Defense Index Commentary

Well, what could have / might have been a quick engagement has likely turned into a quagmire. With Marines and other troops along with additional naval vessels being deployed to the region, it is likely that this war will escalate and continue for some time. Or it may not. There doesn’t seem to be a strategy or plan that define what the end goals of this action are. So, like most people, we are in the dark. Iran appears to be following a scorched Earth policy…attacking anyone and anything no matter the immediate consequences in the hope that their enemy (US, Israel, and whoever else supports or, at least, doesn’t defy their efforts) eventually declares the cost too high. As loss of lives to the US and Israel, for now, appear minimal, Iran’s strategy is to attack economic targets in the region including blocking natural gas, oil, and shipping vessels from going through the Strait of Hormuz. Iran’s missile attack towards Diego Garcia was meant more to strike fear about its ability to hit London and Paris than in any damage it could cause on the UK-US military base. Considering that the nation has launched satellites, an intercontinental missile capability shouldn’t be a surprise…although its accuracy is still unknown.

As energy prices rise, economists are seeing a resultant recession forthcoming. In the US, it is estimated that the cost is more than $2 billion per week. Additionally, a $200 billion request by the Department of War to fund the effort is being requested, though whether that passes or not at that level in a divided Congress is currently an unknown.

Meanwhile, the Russia-Ukraine conflict continues, and the Pakistan-Afghanistan War falls out of the news cycle, except for the occasional article.

The fear of the unknown remains a driver of defense stocks. The Invesco Aerospace & Defense ETF (NYSE: PPA) — as of 3/22/2026 — has seen inflows for 27 consecutive trading days even with the stock market volatility. Year to date, our SPADE Defense Index is up 7.14% and up 43.07% over a 1-year period. This compares to a 4.89% YTD decline and a 14.69% gain in the S&P500, respectively. Investing in defense sector stocks remains strong.

The war with Iran we all saw coming (a “political” solution regarding Iran’s nuclear and missile program was never really a possibility for the Trump Administration) arrived this weekend. Here are our thoughts on the questions many people have…

1. Why now? Truth is, Iran was in a weakened position following last year’s attack by the US and Israel on Iran’s air defense systems, missile facilities, and nuclear facilities. Additionally, many of the proxies it sponsored—Hezbollah, Hamas, and the Houthis—have been significantly weakened. Intelligence efforts revealed that Iran’s Supreme Leader Khomeini (who had been in hiding for much of the time since then) was meeting other key officials at his compound, putting several members of his key leadership in known locations.

• How long will this last?
  • It is unlikely that US and Israeli offensive efforts last more than a week or two. By then, their military objectives will have succeeded.
  • Surprisingly, Iran’s retaliation included targets in neighboring Middle East nations—Saudi Arabia, UAE/Dubai, Qatar, Bahrain, Kuwait, Jordan, and Oman—not just US targets and those in Israel. This effectively eliminated any possible support from other Arab nations, although most that were attacked were Sunni Muslim majority nations vs. Iran, which is 90-95% Shia.
  • Support from military and economic allies Russia and China is not expected to be forthcoming as Russia is in no position to lend military support to Iran. China—which acquires 80% of Iran’s oil exports (at a discount) but that comprises only 13.5% of China’s total seaborne imports—is not expected to engage or support a war that they honestly have little interest in.

• What happens next to Iran?
  • There will likely be a major power vacuum. While there have been protests in Iran that a majority of the population supports, there is no clear leadership to step forward. The military and the Islamic Revolutionary Guard Corps still present a major obstacle for a secular leadership to emerge. The son of the former Shah, Prince Reza Pahlavi, who has lived in exile for the past 47 years is attempting to gather support to lead and ultimately transition the nation to a democracy, but that is far from guaranteed.

• What are the economic implications?
  • In the near-term, most of the impact is likely to be related to oil and natural gas pricing and shipping routes through the Strait of Hormuz. Major shipping carriers have suspended transits through the Strait and the possibility of Iran laying mines in the shipping lanes remains a critical threat. The Houthi’s have also indicated they plan to attack ships in that region. Longer-term, there may be some disruptions to energy, but this should resolve due to output from other nations or the reduced threat of attacks.

• Hidden Implications
  • Russia. Iran was a significant supplier of drones and missiles to the Russian effort of Ukraine, with reportedly more than 2000 Shahed-136/131 kamikaze drones and hundreds of ballistic missiles provided in 2024. This could change the strategic balance in the war between the two nations. Although, Russia has other suppliers it relies on, including China, North Korea, and India, it will likely ration the resources it has at its disposal in the near-term.
• • Terrorism. We can expect individual and small team terrorist actions against the US, Israel, and allied nations. Iran has a number of religious supporters around the globe. The attack in Austin, Texas this weekend, as an example, was likely the first of many to happen in the coming weeks and months.
• • Retribution. Historically, there has been an unwritten rule that nations do not attack the leadership of other nations. The entire concept of diplomatic immunity exists because of this. After the attack on key Iranian government officials (and capturing the leader of Venezuela earlier this year), the US has changed the rules of the game. It would not be a surprise to see one or more assassination attempts against a member of the executive branch and/or Congressional leadership of the US.
• • US Weapons Supply. After last year’s bombing to dismantle Iran’s nuclear weapons facilities, increased training exercises, equipment and supplies transferred to Ukraine, and the current effort in Iran, the stock of missiles, armaments, and missile defense systems held by the US are becoming seriously challenged.

• Impact on Defense Stocks
  • We expect high volume and gains in defense stocks across the board today.
  • In the coming months and year, we anticipate an increased focus on efforts to overcome any supply chain issues to increase the production rate of drones, missiles, and missile defense systems. In advance of this, companies operating in these areas should see increased contracts that would enable the US military to overcome the depletion of supplies.

A nice summary by Frank Gardner, a security correspondent for the BBC. What could happen if the US strikes Iran? Here are seven scenarios. Of course there is an eighth option–Iran capitulates, at least publicly. Without a regime change, it is highly likely that Iran will attempt to develop its nuclear program in secret, in another location. Regardless of how the situation plays out, there will be an extended period of “unknowns” in the region. For investors, the unknown and fear of it has historically benefitted defense stocks. Since additional US naval assets have moved in the region, we’ve noticed inflows into “PPA” the defense ETF that tracks our SPADE Defense Index and its share price again reaching all-time high levels.

What will 2026 bring? As we end 2025 US President Donald Trump is expanding its conflict with Venezuela and announced that it would support another direct attack on Iran if it continued to rebuild its military and nuclear capabilities. Meanwhile, Saudi Arabia warned the UAE to back off in Yemen following airstrikes by Riyadh, raising a new round in the Middle East conflict. China simulated a blockade of Taiwan. Ukraine called for a 50-year support of its defense by the US if it were willing to negotiate a peace treaty while Russia stated (without proof so far) that Ukraine attempted to attack one of Putin’s homes with dozens of drones in order to shift the conversation. Israel has warned about attacking Hezbollah forces in Lebanon, who is seen as too weak to remove them from their territory. And “peace” in Gaza is on hold as Israel waits for Hamas to return a final casualty to them and various nations decide how (and how much) they will support creating an international peace force in the region. Something for investors to keep in mind as investor consider whether the run higher in defense stocks still has room to run.

Firefly Aerospace (FLY) — It completed in 4Q25 a major $855M acquisition of SciTec. SciTec is an important national security firm dealing with classified programs and is involved with defense software for data fusion and mission operations, big data processing, and missile defense, significantly boosting its capabilities for programs like the Pentagon’s Golden Dome initiative. This deal roughly doubles the revenues of FireFly and moves them from being a commercial space company to an important defense supplier. 

nLight (LASR) — A pioneer in high-power lasers for mission-critical defense systems. It has recently received a number of R&D funding contracts from DoD to explore its tech to be used on naval ships and the Golden Dome initiative. It is the only publicly listed tech firm exclusively focused on high power lasers that we have identified. It has a $2B market cap with 68% of its revenues currently from A&D although this is mostly defense related. It would not be a surprise if the technology leads to larger systems development contracts.

Both additions expand the advanced technology component of the SPADE Defense Index.

Anyone who has been tracking the performance of defense stocks knows that European-based and publicly listed firms have soared over the past year. Rheinmettal, for example was up around 2000% over the past five years is now down 22% in the past 6 months. GlobalX’s SHLD ETF has dropped 14% since it peaked in September. Though SHLD still leads YTD due to its high exposure to European stocks and top holding in Palantir, Invesco’s PPA has actually outperformed it by 5% over the past 6 months. End of the run in these stocks or just a lull? Time will tell.

The White House has indicated that it would approve a deal for Saudi Arabia to purchase up to 48 of the F-35 stealth fighter jets manufactured by Lockheed Martin. The deal has already cleared a key Pentagon hurdle but would mark a significant policy shift, even potentially altering the military balance in the Middle East. Israel is currently the only nation in the region possessing this weapon system.

There have been conflicting reports today from the US (stating that Ukraine has accepted the suggested US proposed peace deal between Russia and Ukraine); from Ukraine (there is no deal, but the proposal reflects the foundations of one and they are open to discuss things); and Russia (unless you agree to everything we asked for, there is no deal). From the Ukrainian and European perspective, Trump’s 19-point peace plan does little for Ukraine, other than stopping the death and destruction. It would still mean ceding a landmass the size of the east coast of the United States. Will Putin accept anything other than that? Does anyone actually believe that we wouldn’t come back within a few years to finish the work he has started? Has the ceasefire between Israel and Hamas actually brought peace to the region? Hard to say it has considering the ongoing hostilities in the region. Meanwhile, from an investor perspective, funding by allied nations will continue as Europe and the US restock their military assets and expand their capabilities to prevent future threats; whether by Russia, China, North Korea, Iran, or by other nations and actors.

While some headlines cheer about peace between Israel and Hamas in Gaza, the reality is, it’s more of a cease fire…and even that doesn’t mean much. Reports are that Hamas is systematically going through the region and publicly executing anyone they deem as collaborators with Israel. Additionally, two Israeli soldiers have been killed as well as committing other direct attacks. Israel is reported to be sponsoring “local gangs” to eliminate any remaining Hamas elements and has bombed areas with Hamas elements that are leading the continued fighting. None of this should be a surprise. Hamas has no real intention of simply giving up; they want to remain in power regardless of the impact to the citizens of Gaza. Until the people of Gaza take matters into their own hands, all Israel can do is reduce the organizational structure and supplies that Hamas has available to them. Still, we can expect a lull in fighting over the next several months and more humanitarian aid getting through to those that need it. Peace, however, will be more difficult to achieve.

President Donald Trump intends to unilaterally reinterpret the 35-nation Missile Technology Control Regime (MTCR) agreement it signed in 1987 by designating drones as aircraft rather than missile systems. This will allow them to sidestep the agreement and sell the best US unmanned aerial vehicle weapons to Middle East nations such as Saudi Arabia and the UAE and Eastern European nations. In May 2025, Saudi Arabia requested 100 MQ-9 drones as part of a $142 billion arms deal. Firms such as General Atomics (private), Kratos (KTOS), Anduril (private), and Anduril (among others) could see their products treated as “Foreign Military Sales” by the State Department, allowing them to be easily sold internationally. More here on Reuters. While this change will add billions to US foreign defense sales in an area it has stiff competition in from other nations–like Turkey, China, and Israel–it will undoubtably add a new element of risk if America’s top offensive weapons are sold to nations outside of NATO and top allies.