The war in Gaza has fueled one of the largest surges in U.S. defense demand in recent years, with major contractors reporting booming orders for munitions, missile systems, and replenishment programs. As Washington accelerates military assistance to Israel and rebuilds depleted inventories, a new wave of conflict-driven spending is reshaping the outlook for America’s defense industry — and raising difficult questions about the economics of war.
The Economic Logic of Conflict: Why Wars Drive U.S. Defense Demand
The relationship between military conflict and defense contractor profits follows a well-established pattern. When wars erupt, particularly those involving U.S. allies, American weapons manufacturers see immediate surges in demand as the Pentagon rushes to supply partners and replenish its own stockpiles.
The Gaza conflict, which began after Hamas’s October 7, 2023 attacks, has proven no exception. Within days of the conflict’s outbreak, defense stocks surged approximately seven percent as both institutional and retail investors bought shares in major military contractors. The immediate spike reflected investor confidence that the war would translate into substantial orders for precision munitions, missile interceptors, artillery shells, and advanced weapons systems.
The United States has provided at least $21.7 billion in military aid to Israel since October 2023, creating a massive pipeline of orders flowing to American defense firms. This spending comes on top of the annual $3.8 billion in regular military assistance, demonstrating how conflicts can dramatically accelerate procurement cycles and expand market opportunities for contractors.
What U.S. Companies Are Selling: Missiles, Ammunition, and Interceptors
The systems experiencing the sharpest demand spikes reveal the nature of modern conflict. Iron Dome interceptors, manufactured jointly by RTX’s Raytheon division and Israel’s Rafael Advanced Defense Systems, have become critical components of Israel’s defense architecture, with ten Iron Dome batteries protecting Israeli territory.
Lockheed Martin, the world’s largest defense contractor, has seen particularly strong performance. The company reported $5.5 billion in Middle East sales since October 2023, with its F-35 fighter jets serving as a cornerstone of Israeli air operations. Lockheed Martin stock produced a 54.86 percent total return in the year following the October 7 attacks, outperforming the S&P 500 by approximately 18 percent. A $10,000 investment made just before the attacks would have generated $5,486 in returns within twelve months.
RTX Corporation (formerly Raytheon Technologies) has emerged as perhaps the single biggest beneficiary. The company sold $6 billion worth of weapons to Middle East and North African customers since October 2023, with global sales surging 17 percent to $80.7 billion in 2024. RTX stock delivered an 82.69 percent total return to investors in the year after October 7, outperforming the S&P 500 by about 46 percent. The company supplies bunker buster bombs, guided air-to-surface missiles, and engine systems for F-15 and F-16 fighter jets.
Boeing has accelerated delivery of precision-guided munitions and continues supplying F-15 fighter jets that have been central to Israeli air operations. Boeing’s defense division generated $23.9 billion in 2024, accounting for 36 percent of total company sales, with its military order backlog climbing to $64 billion.
General Dynamics has seen strong demand for artillery ammunition and munitions. The company’s stock returned 37 percent to investors, beating the S&P 500 by over three percent, driven partly by sales of BLU-109 bunker buster bombs and other advanced munitions.
How the U.S. Government Is Funding the Boom
The funding mechanism behind this defense surge combines multiple streams. In April 2024, Congress passed supplemental appropriations including $3.5 billion in Foreign Military Financing for Israel, plus $5.2 billion for missile defense systems including Iron Dome, David’s Sling, and the new Iron Beam laser defense system.
In September 2024, Israel secured an $8.7 billion aid package from the United States, with $3.5 billion designated for essential wartime procurement and $5.2 billion for air defense systems. These emergency appropriations operate outside the regular $3.8 billion annual military assistance framework, creating windfall opportunities for contractors.
The Pentagon has also committed substantial funds to replenishing U.S. weapon stockpiles depleted by transfers to allies. Congressional dynamics have played a crucial role, with bipartisan support for Israel aid ensuring relatively smooth approval of supplemental funding packages despite growing progressive opposition.
A Global Defense Spending Shift Beyond Gaza
The Gaza conflict sits within a broader global rearmament trend that promises sustained growth for defense contractors. Global military spending hit a record $2.7 trillion in 2024, with Israel boosting its defense budget by 65 percent to $46.5 billion to finance operations — the country’s steepest military spending increase since 1967.
Global defense spending logged its tenth straight annual increase, jumping 9.4 percent in 2024. Europe increased outlays by 17 percent year-over-year, while Middle Eastern nations lifted spending by 15 percent to an estimated $243 billion. NATO members agreed to a new target of spending five percent of GDP on defense and security by 2035, a significant increase from the previous two percent benchmark set in 2014.
This sustained global rearmament creates long-term revenue visibility for defense contractors. The wars in Ukraine and Gaza, combined with tensions in the Asia-Pacific, have convinced governments worldwide that higher military spending represents a necessary investment rather than discretionary spending.
However, supply chain constraints and production capacity limitations have emerged as bottlenecks. Defense contractors are racing to expand manufacturing capacity, hire additional workers, and secure raw materials — challenges that may limit how quickly they can capitalize on surging demand.
Market Impacts: Defense Stocks, Supply Chains, and Federal Contractors
The market has rewarded defense contractors handsomely. The iShares U.S. Aerospace & Defense ETF, which tracks major contractors including Raytheon, Lockheed Martin, Boeing, General Dynamics, and Northrop Grumman, surged approximately seven percent immediately after the October 7 attacks.
Major defense firms raised their 2025 financial outlooks based on higher demand, with GE Aerospace stock climbing more than 80 percent year-to-date and Lockheed Martin boosting its full-year revenue forecast to between $74.25 billion and $74.75 billion.
The long-term implications extend beyond immediate stock gains. Defense contractors are securing multi-year contracts that provide revenue visibility for years to come. RTX’s order backlog swelled to a record $217 billion, giving management almost three years of revenue visibility. These massive backlogs enable companies to confidently expand production capacity and hire workers.
Labor shortages pose a growing challenge, however. The defense industry requires highly skilled engineers, technicians, and production workers — talent that takes years to develop. Companies are investing aggressively in workforce development, but capacity constraints may limit how quickly production can scale.
Federal procurement budgets will also feel the strain. The Gaza conflict comes as the Pentagon already faces competing priorities, including supporting Ukraine, modernizing nuclear forces, and preparing for potential conflict in the Pacific. Sustained high spending on multiple fronts may eventually force difficult trade-offs.
Ethical and Political Blowback: The Economics of War Debate
The stark profitability of defense contractors during humanitarian crises has intensified criticism of “war profiteering.” In investor calls shortly after October 7, defense executives discussed how the conflict would “lead to additional orders,” framing Israel’s military campaign as a business opportunity.
The humanitarian toll in Gaza has been devastating. Over 41,000 Palestinians have been killed by Israel’s bombardment of Gaza, with widespread destruction of civilian infrastructure and a humanitarian crisis that prompted international condemnation. Critics argue that U.S. weapons manufacturers are profiting from immense suffering.
Transparency debates surround arms shipments to Israel. The Biden and Trump administrations have faced pressure to publicly disclose the full scope of weapons transfers and their uses. Shortly after October 7, the U.S. transferred more than 15,000 bombs and 50,000 artillery shells to Israel within just the first six weeks, with these transfers deliberately shrouded in secrecy to avoid public scrutiny.
Congressional opposition to unconditional military aid to Israel has grown, particularly among progressive Democrats, though efforts to condition aid have failed. The controversy highlights tensions between America’s stated commitment to human rights and its strategic support for Israel, with defense contractors caught in the middle of an increasingly politicized debate.
Outlook: Is This a Temporary Surge or a Structural Arms Boom?
Multiple factors suggest the current defense spending surge may represent a structural shift rather than a temporary spike. The combination of great power competition with China, ongoing conflict in Ukraine, instability in the Middle East, and NATO’s aggressive rearmament all point toward sustained high defense budgets.
The top 50 weapons makers alone generated $547 billion in revenue in 2023, figures likely to surge in 2024 and 2025 based on ongoing conflicts. Industry executives are positioning for a multi-year boom, investing in expanded production capacity and new technologies.
Several scenarios could shape demand over the next three to five years:
Optimistic scenario for contractors: Continued global instability, successful NATO expansion of defense spending to five percent of GDP, and sustained U.S.-China tensions drive defense budgets higher across major economies. Defense stocks continue outperforming broader markets.
Base case scenario: Defense spending plateaus at elevated levels as conflicts stabilize but geopolitical tensions remain high. Contractors benefit from steady demand and multi-year contracts but face margin pressure from capacity constraints and competition.
Downside scenario for contractors: Peace breakthroughs in Ukraine and the Middle East, combined with fiscal pressures in major economies, lead to slower defense budget growth. Some supplemental funding programs end, creating revenue headwinds.
Key economic indicators to watch include global defense budget announcements, Pentagon procurement authorizations, quarterly earnings reports from major contractors, and geopolitical developments in hotspot regions.
The Bottom Line
The Gaza war has accelerated trends already in motion, transforming the defense industry outlook for years to come. While investors celebrate record returns and contractors expand capacity, the human cost of this “boom” remains inescapable. American weapons manufacturers now find themselves at the center of debates about the economics of endless war — profitable for shareholders, devastating for civilians, and increasingly controversial for policymakers navigating complex ethical and strategic terrain.
As defense spending approaches historic highs globally, the question is no longer whether conflicts drive profits for weapons makers — that much is clear. The harder question is whether democracies can sustain public support for military spending at these levels, particularly when the weapons fuel conflicts with profound humanitarian consequences.
