Growing geopolitical unrest can be catastrophic on a humanitarian scale while leading to significant levels of volatility across international markets. For opportunistic investors, however, geopolitical uncertainty can pave the way for fresh opportunities to pick up defense stocks.

Although the topic of buying defense stocks has historically proven to be a difficult one for retail investors to come to terms with on a moral basis, the industry is forecasted to grow to a market size of $367.3 billion by 2029 and will be buoyed by further government spending should the uncertain climate remain.

Using the iShares US Aerospace & Defence ETF, an industry-specific exchange-traded fund with $6.3 billion AUM, we can see that since the flare-up of conflict in Ukraine in February 2022, the fund has grown around 40%.

The ETF’s upward trend was sustained by an escalation of violence in the Middle East in late 2023, and the implications of these heightened aggressions are clear on Wall Street.

“Increased geopolitical tensions usually force governments to allocate more money to the defense budget,” explains Maxim Manturov, head of investment advice at Freedom24. “Companies that supply essential defense equipment, technology, and services will benefit from this increased spending.”

“Look for defense companies with a diversified portfolio across different defense sectors such as aerospace, cybersecurity, and military equipment manufacturing. Diversification helps reduce risks associated with fluctuations in specific defense segments and provides stability to the overall investment,” Manturov added.

Despite its sustained growth in recent years against the backdrop of geopolitical uncertainty, investors may still need to be wary of an overvaluation creeping in throughout the sector.

According to a recent Goldman Sachs warning, European defense stocks had been trading at a 45% premium to broader equity markets, placing stocks at risk of a market correction.

The value of the industry is likely to be determined more by its growth in light of the changing geopolitical landscape. Should escalations in Europe and the Middle East begin to slow, it’s inconceivable that the sector can sustain its strong rate of growth.

With this in mind, investors should look to conduct sufficient research when diversifying their portfolio with defense stocks and choose only companies with a sustainable commitment to innovation to buy. Let’s explore three defense stocks that could offer the best upside for investors moving forward:

1. Lockheed Martin (LMT)

With a market capitalization of $110 billion, it’s impossible to ignore Lockheed Martin (NYSE:LMT) when looking at picking up defense stocks.

Despite supply chain concerns impacting profits in 2024, Lockheed Martin beat sales predictions by 7.5% and earnings estimates by 10% in its first-quarter report and managed to earn $6.39 per share on sales of $17.2 billion for the period.

Lockheed Martin is one of the world’s largest defense contractors and has built a reputation for its commitment to delivering a diverse portfolio of aerospace and defense solutions that feature aircraft and cybersecurity solutions among its wide repertoire.

The firm is also renowned for its famous ‘Skunk Works’ research center in California, and Lockheed Martin continuously benefits from this industry-leading R&D to build next-generation electronics that can be seen across its suite of aerospace and defense products.

2. Raytheon Technologies (RTX)

Another stock that’s proved its worth in 2024 is Raytheon Technologies (NYSE:RTX). Posting Wall Street growth of more than 15% over the first half of the year, Raytheon Technologies has rallied higher in recent weeks off the back of a positive first-quarter earnings report that saw earnings per share climb to $1.34, beating analyst expectations of $1.23.

The company’s revenue of $19.31 billion also surpassed its $18.41 billion expectations by 4.86%.

While Raytheon Technologies doesn’t have the same level of diversification as Lockheed Martin without the production of vehicles like warships and fighter jets, the firm is a key player throughout a wide range of global military platforms led by other contractors.

Crucially, if investors were to have added the stock at the time of the landmark merger between Raytheon and United Technologies on April 3 2020, their ROI today would be in excess of 110%. This makes the stock one of the best performers on this list, and certainly a firm to keep a close eye on.

3. Northrop Grumman (NOC)

One of the strongest five-year performers in this list is Northrop Grumman (NYSE:NOC). Despite widespread difficulty throughout Wall Street in 2022, NOC recorded growth of more than 36% throughout the calendar year.

Although the stock has failed to build on its momentum entering 2024, posting a slight decline over the first two quarters of the year, Northrop Grumman managed to comfortably beat earnings expectations for the first quarter, posting earnings of $6.10 per share, beating the Zacks Consensus Estimate of $5.95 per share.

Perhaps most impressively of all, is that this means NOC has managed to beat the consensus EPS estimates four times over the past four quarters, making it a stock that’s consistently confounding analysts.

Another firm that specializes in aerospace and defense technology, including unmanned systems and cybersecurity innovation, Northrop Grumman is a key player in the growing stealth warfare industry and has developed a large space-focused portfolio. \

Given its long-term commitment to innovation, the firm appears to be a solid long-term bet for more sustained growth in the future.

Opportunities for Research-Focused Investors

The long-term growth of these defense stocks will rely heavily on the wider geopolitical landscape and the necessity of government spending on increasing defense-focused budgets.

With this in mind, investors seeking to diversify their portfolios and add defense stocks should be mindful to conduct sufficient research into the state of defense spending and look to geopolitics for indicators as to whether industry-focused stocks are likely to show continued outperformance in the future.

As uncertainty continues to afflict the geopolitical landscape, investors can still find opportunities within the growth of the defense sector with plenty of potential upside for its most innovative stocks.