Trading volumes in major defense contractors surged in the conflict’s opening days—rising for some as much as 140% above their average level during Trump’s second term—but the gains didn’t last. Northrop Grumman is now down over 30%, L3Harris Technologies has fallen over 20%, and Lockheed Martin has declined nearly 13%. Raytheon Technologies (RTX)—No. 49 on the Fortune 500—was at one point down about 18%, though the stock has since recovered to up 4% after the company reported better-than-expected second-quarter earnings.

At first glance, the selloff seems counterintuitive. The Pentagon has fired thousands of high-end munitions during the conflict, including more than 1,000 Tomahawk cruise missiles and hundreds of THAAD, Patriot, and SM-3 interceptors to protect U.S. and allied forces, according to the Center for Strategic and International Studies. Replenishing those depleted stockpiles is likely to benefit defense contractors, on top of the Trump administration’s push for a $1.5 trillion defense budget—a 42% increase.

Markets, however, have remained unimpressed. According to Guy Rozentsveig, managing director in industries at investment bank Solomon Partners, one reason is simple: “The consensus opinion is that a lot of that good news was already priced in.”

Now, investors hunting for the industry’s next payday are waiting to see whether higher defense budgets actually translate into new contracts, faster production, and stronger earnings—or whether political and economic pressures slow long-term momentum. Meanwhile, a growing group of newer defense technology companies is hoping to capture a piece of that future spending, too.

Defense stocks are down, but history shows it’s not surprising

Determining whether defense stocks are worthwhile investments takes more than comparing quarterly earnings or even how many missiles are fired alone—it’s often largely centered on how much governments commit to spending in the years ahead.

That’s why, according to Mike Derrios, executive director of the Baroni Center for Government Contracting at George Mason University, the best returns in defense often come long before a conflict begins.

“Investor ‘alpha’ is most likely gained when investments are made before wars and before legislated funding, not after a war has begun, become unpopular, or when associated plus-ups are in doubt,” Derrios told Fortune.

History largely backs that up. When Russia invaded Ukraine in February 2022, for example, several contractors initially outperformed—but, according to a Fisher Investment analysis, much of those gains had already occurred before the invasion. Afterward, defense stocks largely moved in line with the broader market, suggesting that armed conflict alone doesn’t guarantee years of market-beating returns. 

“The rationale sounds logical, but history suggests this isn’t necessarily a winning move,” the firm concluded. For investors chasing the next windfall, the lesson isn’t about the war itself—it’s about being positioned before it starts.

Investors also have to contend with another reality: many of the biggest defense companies aren’t pure-play military businesses. Boeing, for example, derives substantial revenue from its commercial aviation business, meaning separate economic conditions can have just as much impact on its stock as Pentagon spending.

Looking forward, potential change to the U.S. political environment could also sway investment, said Byron Callan, managing director at Capital Alpha Partners, an independent research analysis firm tracking the defense sector.

“If the public reacts even more negatively to a resumption of fighting with Iran, that’s going to bode even worse for GOP prospects in the midterm elections—what will that say about defense in ‘27 and ‘28?” Callan said on the July 20 episode of the Defense & Aerospace Report podcast.

The broader economy also remains a risk, he added: “If energy is going to spike again and you’re going to see higher inflation, you’re going to see higher interest rates as the Fed tries to tamp that down.”

Many of the defense players are entering the second half of the year on strong footing thanks to enlarged order books. RTX and Northrop Grumman recently reported record backlogs of $289 billion and $105 billion, respectively, while Lockheed Martin’s backlog stands at $167 billion.

The next winners may not be the defense old guard

Even if Washington follows through on its defense spending plans, not all investors are convinced the biggest winners will be the industry’s traditional contractors.

Over the past few years, venture capital has poured billions into a new generation of defense technology startups promising to build weapons systems faster, cheaper, and with more software than the Pentagon’s legacy suppliers. The investment boom has reshaped the sector, creating a growing crop of multibillion-dollar companies—and fueling an emerging bubble in the defense tech space, as analyzed by Fortune’s Allie Garkinkle

In the first quarter of 2026 alone, venture capital firms deployed a record $19.8 billion into defense tech across 262 deals, according to PitchBook. That’s up from $17 billion in the first quarter of 2025 and just $5.7 billion during the same period two years earlier.

Today, companies like Anduril (whose valuation recently doubled to $61 billion), Shield AI ($12.5 billion), and Saronic ($9.25 billion) are among Silicon Valley’s fastest-growing defense startups.

For now, however, they’re still fighting for a relatively small slice of Pentagon spending. Contract dollars to the 15 highest-valued defense-tech startups tripled between 2022 and the last fiscal year, yet they still accounted for less than 1% of all Defense Department contracting dollars, according to The Wall Street Journal.

But that could begin to change. A recent Government Accountability Office report found that the Pentagon’s largest acquisition programs now take an average of more than 12 years to deliver new capabilities—a timeline that continues to grow as major weapons programs face delays. Those bottlenecks have fueled interest in companies that promise to move at Silicon Valley speed rather than traditional defense timelines.

For investors, that means the next defense boom may not simply reward the companies that have dominated military contracts for decades. It could also create millionaire-making opportunities for those willing to bet early on startups as the Pentagon reshapes how it buys its next-generation defense capabilities.