Defense stocks have floundered since the Iran war began. Here's why

Defense stocks haven't been the slam-dunk play some investors expected as the U.S.-Iran war broke out. The iShares U.S. Aerospace & Defense ETF (ITA) has dropped about 12% since the start of March, when the Middle East conflict began escalating following the U.S.-Israeli strike on Iran. The S & P 500 added 3.5% over the same period. ITA .SPX 3M mountain ITA vs. the S & P 500, 3-month The ETF fell more than 1% on Tuesday, on track for its sixth negative day of the last seven. The fund is now near its flatline for 2026, meaning it could snap a five-year win streak. Great expectations Investors were spooked by a recent batch of earnings reports that didn't meet the high bar set by Wall Street. They also are questioning where U.S. government spending heads from here and how much further upside defense stocks can offer. RTX fell more than 11% last week after full-year guidance for adjusted sales missed Wall Street's forecast. Lockheed Martin tumbled more than 13% over the same period on weaker-than-anticipated earnings for the first quarter. Both stocks recorded their worst weeks since 2020. Bank of America analyst Ronald Epstein said earnings expectations for the sector were "skewed too high," resulting in post-release sell-offs. He said investors are now wondering if "peak defense" has been reached. "The reported numbers were generally ok," Epstein wrote to clients. …