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IRAN STRIKES JOLT U.S. DEFENSE STOCKS, BUT STAYING POWER HINGES ON WASHINGTON'S 2027 BUDGET

The initial rush into US defense stocks after the weekend's U.S.-Israeli strikes on Iran is already fading. For investors, the real swing factor isn't the strikes themselves, but whether Washington pushes through a bigger 2027 defense budget.

Strategists at Bank of America and Bernstein say the pattern is familiar, geopolitical shocks tend to spark knee-jerk rallies, but those gains rarely hold unless there's prolonged instability or a clear, sustained rise in spending.

Both brokerages note that defense shares "normally rise short‑term on events, but upside is not sustained unless there is extended instability or conflict driving budgets," according to strategists at Bernstein.

BofA analysts say the latest flare-up could further strain already depleted U.S. stockpiles, reinforcing pressure for higher procurement. But they stress that the real test for lasting performance will be whether the administration leans into a larger FY2027 request, a push that becomes clearer once the budget process begins later this year. The bank expects upward pressure on spending but warns political roadblocks could limit the size of any increase.

Both firms also point out that defense names had already priced in some Iran risk and expectations for a bigger budget. Without a sharp deterioration in regional stability, strategists say the latest jump is likely to fizzle much like previous short-term bursts following the 2023 Hamas attack and earlier U.S. strikes in the region.

By midday Tuesday, that pattern was already playing out. Major U.S. defense stocks had surrendered most of of Monday's gains, with the sector losing momentum. S&P 500 Aerospace and Defense .SPLRCAERO index is down 2% after gaining 2.6% in prior session.

(Rashika Singh)

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