Bernstein analysts, including Douglas Harned and Adrien Rabier, told clients that a nuclear accord lowering tensions between the United States and Iran would likely translate into a drop for U.S. defense stocks. The firm noted that while a diplomatic resolution would be welcome from a geopolitical perspective, it would tend to reduce the tailwinds defense names have recently enjoyed.
The analysts observed that the United States has positioned the largest set of military assets around Iran since the 2003 invasion of Iraq as Washington presses Tehran to accept terms. Negotiations over Iran's nuclear program wrapped up most recently without a definitive agreement. Technical-level discussions are scheduled to continue next week in Vienna, according to Omani Foreign Minister Sayyid Badr Albusaidi, who posted on X following the Geneva meetings.
U.S. President Donald Trump has signalled a preference for pursuing a diplomatic path, but the potential for conflict between Washington and Tehran has already altered market behavior. The S&P Aerospace & Defense Select Industry index has climbed 4% in February and is up more than 17% year to date, gains that Bernstein attributed in part to rhetoric from the Trump administration endorsing additional military spending in coming years.
Bernstein's note to clients argued that, historically, rising geopolitical tensions have prompted governments to expand defense budgets, which in turn lift contractor revenues. However, the firm cautioned that when tensions prove to be short-lived, any stock-price gains tied to those events frequently fade quickly. The analysts pointed to a U.S. strike on Iranian nuclear infrastructure last year, which they said "had no impact" on defense stocks.
On the likelihood of sustained military campaigns, Bernstein wrote that a U.S. attack on Iran is "unlikely to lead to extended operations with broad political support in the U.S." They concluded that while an attack could produce short-term gains for defense equities, longer-term appreciation would require more substantive and persistent factors than a limited military action.
Rather than focusing solely on developments in Iran, Bernstein recommended market participants pay attention to budget discussions in Washington. The analysts highlighted the Trump administration's proposal to raise the 2027 military budget to $1.5 trillion as a more meaningful determinant of contractor revenue trends going forward. "There is certain to be more money for defense contractors on the horizon. The questions will be how much and how it will be spent," they wrote.
Clear summary
Bernstein says a successful nuclear deal between the U.S. and Iran would likely reduce the recent rally in U.S. defense stocks, which have been supported by heightened tensions and administration talk of larger future military budgets. Short-term stock bumps tied to fleeting geopolitical events have historically not persisted, the analysts note, making the proposed 2027 budget trajectory a more important variable for sustained gains.
Key points
- Bernstein expects a diplomatic resolution with Iran to be positive for regional stability but negative for near-term U.S. defense stock performance.
- The S&P Aerospace & Defense Select Industry index rose 4% in February and is up over 17% year to date amid heightened tensions and comments supporting increased military spending.
- Longer-term upside for defense contractors depends more on sustained budget increases - notably the Trump administration's call for a $1.5 trillion 2027 military budget - than on short-lived geopolitical events.
Risks and uncertainties
- Ongoing diplomatic talks - The outcome of nuclear negotiations and subsequent technical discussions in Vienna are uncertain, creating volatility for defense stocks and related sectors.
- Ephemeral market reactions to conflict - Historical patterns suggest that short-term military actions, such as last year’s strike on Iranian nuclear infrastructure which "had no impact" on defense equities, may not deliver lasting gains.
- Budget implementation - While higher proposed defense budgets could benefit contractors, questions remain about the final size and allocation of future spending, affecting the defense industrial base and its suppliers.
Note: This article reports on analysts' views and described developments as presented in the analysts' client note and subsequent public statements from government officials. It does not add new facts beyond those stated by the analysts or officials.