Global Arms Sales Hit Record Highs: Which Defense Stocks Are Ones to Watch

Additionally, several major U.S. defense contractors have supported defense efforts in the Middle East by providing armaments used in its conflicts with Hamas and Hezbollah. Israel launched its war against Hamas in October 2023 in retaliation for Hamas’ attack against it during the same month. Israel began a major ground offensive against Hezbollah’s bases in Lebanon on September 30 after the latter organization had been launching missiles into Israel for nearly one year.

These two conflicts have significantly increased the demand for weapons globally. Worldwide arms sales  to governments climbed a record 6.8% in 2023 to $2.4 trillion. The latter figure represented the highest amount ever spent by countries on weapons in a single year.

In light of all of these points, it’s unsurprising that many U.S. defense stocks have performed quite well in the 12 months that ended on November 20. For example, Lockheed Martin (LMT) climbed 20% during that period, RTX (RTX) soared 47.5% during that time, General Dynamics (GD) logged a 13.3% increase,  and defense electronics and airplane parts maker Curtis-Wright (CW) generated a huge 71.5% gain for its shareholders.

And yet, as you can see in the chart below, many large defense stocks’ average price-to-earnings ratios are either below or not significantly above the S&P 500’s mean P/E ratio of 30 times.

Meanwhile, even if the wars being fought by Ukraine and Israel are settled in the medium term, the demand for weapons is likely to remain elevated globally, while U.S. arms makers’ sales will probably keep increasing meaningfully.

That’s because many if not most U.S. allies will continue to face tough adversaries within their regions. Israel will have to keep taking on Iran and Hezbollah, while Ukraine and many other European countries will continue being wary of Russia. Moreover, Taiwan and a multitude of other nations in China’s vicinity, including Japan, the Philippines,  and India, will still in all likelihood be nervous about the latter country’s potential territorial ambitions.