The Defense Premium: Why RTX and Lockheed Rise While the Market Falls

As of April 7, 2026, the US stock market remains under pressure: the S&P 500 is down roughly 4% year to date, and the technology sector has fallen about 10% from its peak. But inside that broad retreat, one sector is behaving very differently.

Shares of RTX (formerly Raytheon) have reached a record $245 per share. Lockheed Martin is trading near its own highs. Earnings for the entire defense sector in Q1 2026 are being tracked at roughly +5% year over year, while the broader market had been expected to show growth of just -0.03% at the start of the year. For early April, that is the largest sector gap since 2003.

This divergence is not random noise. It is a structural signal. It illustrates one of the most important and least intuitive phenomena in investing: sector rotation during geopolitical conflict.

What Sector Rotation Means

The stock market is not a single block moving in one direction. It is made up of sectors that react differently depending on the macroeconomic environment. When some sectors fall, others can attract new capital.

Sector rotation is the movement of capital between sectors as conditions change. This is not a tactic for speculators. It is a basic market pattern that appears in every economic cycle.

In peacetime, with low interest rates, technology companies usually perform best: they can borrow cheaply, grow quickly, and trade at high premiums based on future profits. During recessions, defensive sectors lead instead: consumer staples, healthcare, and utilities, where demand stays relatively stable regardless of the cycle. During inflationary pressure, the commodity sector tends to outperform, especially oil and gas companies.

But during geopolitical conflict, especially one that implies large-scale state spending on weapons, rotation tends to favor the defense and aerospace sector.

Why Defense Companies Rise While the Market Falls

Defense companies operate under a different economic logic than smartphone makers or retailers. Their main customer is the government. And government orders do not disappear in a crisis. If anything, they increase.

When the Trump administration released its draft federal budget for fiscal year 2027 on April 2, 2026, the numbers were unprecedented:

• Total defense budget: $1.5 trillion ($1.15 trillion base budget plus $350 billion in supplemental appropriations).
• Orders for F-35 aircraft doubled to 85 units.
• $25 billion was allocated to the "Golden Dome" missile defense system.
• According to FinancialContent, March labor data showed a sharp increase in hiring specifically in the defense sector.

For RTX, Lockheed Martin, Northrop Grumman, and General Dynamics, such a budget represents a visible order book for years ahead. When CEOs report to investors, they can point to specific contracts rather than assumptions about demand. That reduces uncertainty around future earnings, and the market pays a premium for certainty.

The Idea of "Warflation"

Analysts tracking the gap between defense stocks and the rest of the market have introduced the term "warflation": a blend of the words "war" and "inflation."

The idea is that military conflict simultaneously:

1. Raises inflation through an oil shock and supply-chain disruption.
2. Reduces consumer and corporate demand because of uncertainty.
3. Redirects government spending away from civilian sectors and toward defense.

The result is a countercyclical effect: defense companies are not just resilient during warflation, they are direct beneficiaries of it. While the technology sector faces multiple compression from higher rates and slower consumer demand, weapons and defense-equipment producers receive growing demand financed by the state budget.

A Euronews analysis captured this split early in the conflict: stocks with direct or indirect exposure to defense contracts consistently outperformed broader market indices on a relative basis.

Why This Is Not the Same as "Just Buy Oil"

Geopolitical shocks always push oil and gas stocks higher, and the current situation is no exception: Exxon and Chevron are up more than 30% year to date as WTI has climbed above $110-115 per barrel.

But from an investor's perspective, there is a crucial difference between oil companies and defense companies:

• Oil companies depend on the price of oil. If the Strait of Hormuz reopens and prices fall, their shares will react quickly.
• Defense companies depend on government budgets. Even if the conflict cools down, the increase in defense spending outlined in the 2027 budget will not disappear overnight. Changes to defense spending require legislation and typically happen slowly.

That makes the defense sector a more structural beneficiary than oil stocks, whose upside depends on how long the oil shock lasts.

Risks and Caveats

Any story about a "safe place in a crisis" needs caveats.

Valuations are already high. RTX is trading at a forward P/E of roughly 22-24, above its 10-year average. If the conflict unexpectedly de-escalates or budget negotiations in Congress drag on, the stock could correct sharply even without any deterioration in fundamentals.

Concentrated risk. All major US defense contractors depend on a small number of government programs. The cancellation or reduction of a single large contract can materially affect earnings. Unlike diversified consumer companies, defense firms do not have an order book spread across thousands of customers.

Regulatory and ethical context. Some ESG-focused funds avoid defense companies for responsibility-related reasons. If you invest through index ETFs, it is worth checking whether the fund includes this sector and to what extent.

Geopolitical unpredictability. The same factor pushing defense stocks up, geopolitical tension, is fundamentally unpredictable. Negotiations can succeed unexpectedly, and prices may normalize faster than the market expects.

What This Means for Investors Connected to Ukraine

For Ukrainian investors, the current situation has several dimensions.

A direct link through Ukroboronprom. The state defense group, which is moving toward a more commercial model, operates in the same global environment where demand for defense production is growing at an extraordinary pace. The long-term development of Ukraine's defense-industrial base is part of a broader global rearmament trend.

A side effect for reconstruction. Part of the increase in defense spending competes with reconstruction funds for budget priority. Governments that are rearming have less fiscal space for civilian aid. That does not mean reconstruction will be abandoned, but it is a real source of pressure on partner-country budget priorities.

Sector rotation as a lesson in diversification. The current gap between defense and technology stocks illustrates why a portfolio concentrated in one type of asset, especially the assets that performed best in the recent past, carries hidden risk. What worked best in 2020-2024, namely growth technology stocks, does not necessarily work best in 2026.

Practical Takeaway for a Retail Investor

Sector rotation is not an active trading strategy for a retail investor. Trying to "catch" the move from one sector to another usually ends up costing more than doing nothing: you sell what has already fallen and buy what has already risen.

A few practical points:

• Check the structure of your ETFs. If you hold a broad market ETF such as the S&P 500 or MSCI World, the defense sector is already in your portfolio in proportion to its index weight.
• Separate "expensive now" from "structurally promising." The defense sector can be both at the same time. The answer is not necessarily to buy or sell immediately, but to understand why prices are where they are.
• Watch the US budget process. Congressional votes in September-October 2026 on defense appropriations are the key risk-realization point for this sector.

Summary

Defense stocks hitting all-time highs in the middle of a market retreat is not an anomaly, and it is not unfairness. It is sector rotation in action: capital is moving toward the parts of the market whose earnings look more protected in the current environment.

The logic is straightforward: geopolitical conflict -> rising defense budgets -> visible order books -> stable or growing earnings -> higher valuations. That logic is not eternal. It depends on a prolonged conflict and on state spending remaining in place. But as long as both conditions hold, the divergence between defense stocks and the broader market will remain one of the defining features of the 2026 market environment.