By Dr Majid Khan (Melbourne):
When missiles are launched over the Middle East or Russian drones strike Ukrainian cities, the immediate images are of destruction: burning buildings, emergency shelters and civilians running for safety. Far from the battlefield, however, another reaction is taking place. Investors are watching defence stocks.
The connection between war and financial markets has become one of the defining economic stories of 2026. As conflicts in Ukraine and the Middle East consume weapons at extraordinary rates, governments are ordering replacements, expanding military budgets and accelerating procurement programs. Defence companies are responding by increasing production, expanding factories and raising financial forecasts. For investors, the message is straightforward. A dangerous world can be a profitable one.
That does not mean that defence companies create wars or that every investor buying a military stock is betting on human suffering. Wars have complex political and strategic causes. But once fighting begins, a powerful economic mechanism takes over. Weapons are consumed. Stockpiles fall. Governments replenish them. Production increases. Contracts grow. Revenues rise.The battlefield and the balance sheet become connected.
On July 23, Lockheed Martin raised its 2026 sales and profit forecasts as the wars in Ukraine and Iran drove demand for missiles and other military equipment. Its second-quarter sales reached $20.1 billion, an 11 per cent increase from the same period a year earlier, while its backlog reached approximately $230 billion. Revenue from its missiles and fire-control business increased by almost 20 per cent to $4.1 billion. The company also benefited from a $35 billion contract to increase production of THAAD missile interceptors.
The stock market noticed. After Lockheed and RTX raised their forecasts, Lockheed shares jumped 10.6 per cent and RTX gained 7.7 per cent as investors responded to expectations of sustained military demand.
RTX, the parent company of Raytheon, reported second-quarter 2026 sales of $24.7 billion, up 14 per cent from the previous year. Its defence business benefited from strong demand for air and missile-defence systems, while the company’s total backlog climbed to $289 billion. RTX subsequently raised its full-year 2026 sales and earnings forecasts.
These are not merely abstract financial figures. They demonstrate how a war moves through the economy. A missile launched against an aircraft creates a requirement for another interceptor. An artillery shell fired in Ukraine creates a replenishment requirement somewhere in Europe or the United States. A drone destroyed by an air-defence system creates another procurement decision.
The war consumes the product, the government orders more of it, the manufacturer produces more and investors anticipate higher future revenues. This is why the modern defence industry can benefit from conflict without directly participating in the political decisions that caused it.
Governments that have watched their inventories fall during combat do not simply return to their previous military budgets when a ceasefire is signed. They often decide that the previous stockpile was inadequate. They want more missiles, more drones, more aircraft, more radar systems and more ammunition. Peace can therefore produce another wave of military spending.
A ceasefire may reduce the immediate risk premium attached to defence companies, but it can simultaneously create a replenishment cycle. Military planners review battlefield performance and identify weaknesses. Weapons that proved effective receive larger orders. Systems that failed are replaced or redesigned. The war becomes a laboratory for future procurement.
The global defence industry was already expanding before the latest U.S.-Iran confrontation. The most recent comprehensive SIPRI dataset, covering 2024, recorded $679 billion in arms revenues among the world’s 100 largest arms-producing and military-services companies, a record at the time. SIPRI reported that 77 of those companies increased arms revenues and said the persistence of demand and large backlogs suggested further increases in the years ahead.
The significance of that figure becomes clearer when combined with what happened in 2026. Europe is rearming because of Russia. Middle Eastern governments are expanding missile piles and military capabilities because of Iran and wider regional instability. Asian governments are increasing military spending because of concerns surrounding China and the possibility of future conflict.
The result is a global procurement cycle, fear creates demand, demand creates contracts, contracts create production, production creates profits, the stock market then evaluates those profits.
A defence company that wins a multibillion-dollar contract can employ thousands of workers, expand manufacturing capacity and provide investors with years of predictable revenue. Communities may welcome new factories and the jobs they create. Governments may regard the industrial base as strategically essential.
But the same economic system raises difficult ethical questions. If war generates enormous commercial opportunities, what happens to political incentives?
If military contractors become major employers in particular regions, politicians have an incentive to protect defence programs. If military production supports local economies, reducing defence spending becomes politically difficult. If investors depend on defence companies for returns, geopolitical instability can acquire an uncomfortable financial constituency.
All of this demonstrate something much dramatic that modern economies have become deeply intertwined with military spending. The business of preparing for war has become a permanent economic sector.
For the civilians living through war, none of this is theoretical. They experience the consequences in destroyed infrastructure, displacement, inflation, shortages and loss of life.
For governments, war is an extraordinary expenditure. For defence companies, it is extraordinary demand and for financial markets, it is a source of information about where governments are likely to spend their money next.
That is the uncomfortable connection between the battlefield and the stock market in 2026. The missiles flying over the Middle East and the drones crossing the skies of Ukraine are not only military events. They are also signals that travel through government budgets, corporate order books and investment portfolios.
A war can destroy a city in the morning and create a procurement contract months later. A ceasefire can stop the shooting while triggering years of military replenishment and a new threat can create demand before the first missile is ever launched. The world may continue to hope that wars end quickly. The defence industry, however, is increasingly structured around preparing for the possibility that they will not.
That is what makes modern warfare so economically powerful and so difficult to separate from the business interests that surround it.
