America’s defense boom is starting to look like a supply crisis in disguise. The industry is posting record profits while its closest buyers look elsewhere after six weeks of Iran conflict strikes drained regional missile stockpiles. Gulf buyers are now turning to alternative suppliers, exposing a capacity crunch that years of rising demand still have not fixed.

Defense’s crosscurrents: Defense contractors are printing the kind of numbers most industries can only dream of. Northrop GrummanNOC

reported Q1 profit surging to $875M from $481M a year earlier, with CEO Kathy Warden pointing to an “unprecedented global demand environment.” RTXRTX

raised full-year guidance after Q1 revenue rose 9%, while GE AerospaceGE

saw orders jump 87% as commercial and military demand picked up. Yet despite the blowout results, the sector’s stock performance is lagging:

• The iShares Aerospace & Defense ETFITA
  has dropped 8% since the Iran conflict began in late February, lagging the S&P 500 by three percentage points.
• Valuations were already stretched, with Northrop Grumman and Lockheed MartinLMT
  trading at 24x and 21x forward earnings, up from 17x and 16x a year ago after a 66% sector rally.

Shopping Beyond the Arsenal of Democracy

The hard truth for American defense firms is that output is falling short of wartime demand. Even with Donald Trump proposing a $1.5T defense budget for fiscal 2027, a more than 40% increase and the largest since the Korean War, production timelines still run years out. Around 20 countries depend on the Patriot air defense system, yet inventories have been stretched by Ukraine to the point where Switzerland is weighing canceling its 2022 order after repeated delays, as Gulf nations move on to faster alternatives.

• Saudi Arabia has tapped South Korean defense firms to speed up M-SAM orders, while also signing weapons production deals with Ukraine.
• The UK’s Cambridge Aerospace will supply Gulf states with low-cost anti-drone missiles after officials asked firms what they could deliver within 30, 60, and 90 days.

Guns N’ Budgets: The IMF warns governments are being pushed to choose between defense and social spending. About half of the countries have raised military budgets, with EU outlays hitting 381B euros in 2025, up nearly 63% since 2020. Data since World War II shows these spikes often strain finances, driving higher debt and cuts to welfare. Capital Alpha Partners analyst Byron Callan sees the Iran conflict extending into fall 2026, prolonging supply constraints. For US defense stocks, that sets up a trade-off — they may win today’s earnings battle while risking tomorrow’s market share war.