2 defense stocks best-positioned for Strait of Hormuz uncertainty

LMT Has Crushed the S&P 500 by 27.5 Points YTD While RTX Adds Quiet Outperformance

Source: Yahoo Finance, Finnhub. Daily adjusted close prices, January 2 to April 13, 2026.

The Persian Gulf Just Became the Most Expensive Chokepoint in Investor Portfolios

The Strait of Hormuz channels roughly 20% of the world's daily oil consumption through a 21-mile corridor, and Iran-related military escalation has made that flow a live risk variable for global markets. U.S. and allied naval assets are forward-deployed in the Fifth Fleet's area of operations. GCC states are accelerating defense procurement at the fastest pace since the 1991 Gulf War.¹

This matters for portfolios because it has triggered a multi-year defense spending cycle across three buyer pools simultaneously. The U.S. Department of Defense is prioritizing integrated air and missile defense after the April 2024 Iranian drone and missile barrage on Israel exposed critical munitions depletion.

NATO allies have committed to spending 2%+ of GDP on defense, with Poland and Germany now comfortably above that threshold, while U.S. Indo-Pacific treaty allies led by Japan are executing the largest peacetime defense build-ups in their post-war history.² Gulf states led by Saudi Arabia and the UAE are in parallel running the largest arms-procurement programs in their history.

The Market Misread. Defense Stocks Are Not Just a "Geopolitical Trade"

Financial media frames LMT and RTX as geopolitical hedges, implying the trade only works if tensions persist. That framing misses the structural shift underneath. Defense budgets are multi-year commitments, not event-driven trades that unwind when a headline changes.

The April 2024 Iranian attack on Israel is estimated to have consumed on the order of $1 billion in interceptors in a single night, with published estimates ranging from roughly $1.0 to $1.3 billion depending on which munitions and partner-nation assets are counted.³ That number revealed something the market has been slow to price. Global stockpiles of advanced missile interceptors are dangerously low, and the production capacity to refill them takes years to build. RTX is the primary beneficiary of this replenishment supercycle.

The Pentagon has already authorized emergency production increases for Patriot interceptors. NATO allies are placing orders for Standard Missiles at a pace not seen in decades. These are contract commitments that persist regardless of whether the Strait of Hormuz situation escalates or stabilizes next month.

LMT's backlog tells the same story from the air superiority side. The order book reached a record $194 billion at the end of Q4 2025, representing roughly two-and-a-half years of forward revenue already locked in.⁴ Lockheed delivered a record 191 F-35s in 2025 — above the 156-unit annual baseline, driven largely by clearance of the TR-3 software-pause backlog rather than a sustained lift in steady-state production — and international orders from Poland, Greece, and South Korea add incremental demand on top of the U.S. baseline, even as the Pentagon trimmed its FY2026 F-35 buy from 74 to 47 units.

Calling this a "geopolitical trade" is like calling the cloud computing buildout a "COVID trade" in 2021. The catalyst may have been the event, but the spending cycle is structural.

LMT at $619.69 Is the Earnings Machine at a Discount Multiple

Lockheed Martin has beaten EPS consensus in seven of the last eight quarters, with the only blemish being a Q4 2025 miss ($5.80 actual vs. $7.07 estimate). Despite that miss, the prior seven beats ranged from roughly +5% to +16%, and the stock has still outperformed the S&P 500 by roughly 27 points YTD, signaling the market is looking past the one-time charge to the underlying demand cycle.⁵ Full-year 2025 GAAP EPS totaled $27.32, and the FY2026 consensus of roughly $30 to $32 (FMP vs. Yahoo Finance) implies high-single to low-double-digit growth off that base.

That prices the stock at roughly 19-21x forward earnings against consensus FY2026 EPS in the $30-32 range (yfinance vs. FMP consensus), a meaningful discount to the broader large-cap defense peer group and to mega-cap tech multiples in the 25-30x range. With a 3-yr weekly beta of 0.24 and near-zero correlation to the S&P 500, LMT offers rare equity exposure that is essentially uncorrelated with broad-market risk.⁶

Lockheed's product portfolio reads like a procurement checklist for any Strait of Hormuz escalation. The F-35 remains the primary fifth-generation fighter for the U.S., Israel, and an expanding list of Gulf state buyers. THAAD is the top-tier ballistic missile interceptor, and demand surged after Iran's 2024 strikes.

JASSM is the precision strike weapon of choice for standoff operations. After a FY2026 procurement dip to ~396 units, the Air Force is contracted to ramp JASSM-ER production to roughly 810 per year under a multi-year procurement award beginning FY2027, backed by explicit Congressional direction to rebuild stockpiles after Ukraine and Middle East drawdowns.⁷

The portfolio construction case is equally compelling. LMT's trailing 250-session Pearson correlation to SPY on daily returns is 0.08.⁸

For practical purposes, that is zero. Adding LMT to a portfolio does not duplicate existing equity risk. It adds a differentiated return stream driven by defense budgets, geopolitical events, and government contract cycles that operate independently of corporate earnings seasons, consumer spending, or Fed policy.

The 2.2% dividend yield provides a floor, backed by a 62% payout ratio that leaves room for growth. Twenty analysts carry a mean target of $667.85, with a high of $770.00.⁹

LMT and RTX Have Not Missed a Single Quarter in Two Years

Source: Finnhub Earnings API. EPS actual vs. consensus estimates, Q1 2024 through Q4 2025.

RTX at $201.41 Owns the Missile Defense Franchise No One Can Replace

RTX is the world's dominant supplier of missile defense systems. The Patriot PAC-3, the Standard Missile family (SM-2, SM-3, SM-6), and the Stinger MANPADS are all RTX products.¹⁰ There is no credible alternative supplier for most of these systems, and every military confrontation in the Middle East since 2023 has resulted in urgent replenishment orders.

Revenue hit $88.6 billion over the trailing twelve months, growing at 12.1%.¹¹ That growth rate from a company with $271 billion in market capitalization is remarkable. The Pratt & Whitney engine division provides a commercial aerospace tailwind through the Airbus A320neo family, while the Raytheon missile and defense segment captures direct geopolitical demand.

RTX's operating margin of 11.0% exceeds Lockheed's 9.0%, and its free cash flow of $6.5 billion funds both R&D investment and capital returns. The 1.35% dividend yield is lower than LMT's, but the 54% payout ratio signals that RTX is retaining more earnings for growth reinvestment.¹²

The analyst consensus is notably stronger for RTX. Twenty-two analysts carry a consensus "buy" rating with a mean price target of $216.34 and a high of $242.00.¹³ RTX has returned 57% over the trailing twelve months, nearly doubling the S&P 500's return. Despite this run, the forward P/E of 26.8x reflects a premium the growth rate justifies.

Why LMT and RTX Over the Rest of the Defense Sector

Northrop Grumman (NOC) at $681.31 carries a negative trailing-250-day beta (-0.16 vs. SPY) that makes it a pure defensive play, but its trailing-250-day Sharpe of 0.90 trails both LMT (1.09) and RTX (1.79). The B-21 Raider program is transformative, but it is a fixed-price contract with margin risk that makes the upside less clean.¹⁴

General Dynamics (GD) skews toward ground combat vehicles and Gulfstream business jets. A Strait of Hormuz scenario primarily demands air and missile defense, not armored vehicles. GD's YTD return of +1.2% materially lags LMT and RTX, reflecting this mismatch.¹⁵

Boeing (BA) carries a 0.95 beta and a +2.3% YTD return that trails LMT by roughly 26 points and RTX by about 7.5 points. Its defense division has been plagued by fixed-price contract losses on programs like the VC-25B and the T-7A trainer, and the 0.95 beta introduces the broad market correlation that defeats the purpose of a geopolitical hedge.¹⁶

LMT Leads the Defense Sector YTD, While Boeing and GD Lag the S&P 500

Source: Yahoo Finance. YTD returns as of April 13, 2026.

Key Metrics Comparison

Source: Yahoo Finance, Finnhub API. All data as of April 13, 2026.¹⁷

Risk Profile

Source: Yahoo Finance daily prices, trailing 250 trading sessions ending April 13, 2026. Beta and correlation via OLS regression of daily log returns vs. SPY. Risk-free rate 4.5% (3-mo T-bill proxy). Different windows or frequencies would produce different values — a 3-yr weekly beta for LMT, for example, prints closer to 0.24.¹⁸

Catalyst Map

The Counter-Argument

The strongest case against this trade is de-escalation. If the Iran conflict resolves through diplomacy, if Strait of Hormuz tensions recede, and if the global defense spending cycle moderates, the geopolitical premium embedded in both stocks evaporates. Markets have priced geopolitical premiums into defense stocks before, only to see them unwind rapidly when tensions ease.

LMT's trailing P/E of 28.8x already reflects a 60-80% premium expansion from its historical 15-18x range. If forward earnings of $32.05 do not materialize, the stock is expensive. Any miss on the F-35 delivery schedule or further margin compression on fixed-price contracts could trigger a re-rating back toward that historical range.¹⁹

Lockheed's FY2025 debt-to-equity ratio of roughly 323% is elevated for an industrial — though Boeing, with negative free cash flow and a crushed equity base, prints a much higher D/E and sits in a different risk bucket. LMT's leverage leaves less balance sheet flexibility if cash flows disappoint, and amplifies both the upside and the downside of any earnings volatility.

RTX carries its own set of vulnerabilities. The forward P/E of 26.8x prices in continued momentum that could stall. The Pratt & Whitney geared turbofan engine has experienced recall and inspection issues that have grounded Airbus A320neo aircraft, and any worsening of that situation directly impacts revenue and margins.²⁰

RTX's trailing P/E of 40.6x signals that trailing earnings are still depressed relative to forward expectations, meaning the "growth" thesis depends on projections rather than demonstrated performance. If those projections disappoint, the re-rating would be swift.

More broadly, the defense sector faces a structural paradox. When geopolitical risk drives the trade, the best outcome for the world is the worst outcome for the position.

Investors who size these as geopolitical hedges must accept that the hedge works only as long as the crisis persists or escalates. A sudden diplomatic breakthrough, such as a comprehensive Iran nuclear deal, would likely trigger 10-15% downside in both names within weeks.

The U.S. fiscal environment introduces additional uncertainty. The FY2027 defense budget authorization process is underway, and while bipartisan support for defense spending remains strong, any debt ceiling confrontation or spending sequestration risk could cap the growth in U.S. defense procurement that both companies depend on.²¹