The relationship between geopolitical conflict and financial markets is complex, counterintuitive and — for those who understand it — potentially profitable. While wars are devastating for most sectors of the economy and for broader market indices in the short term, they consistently create exceptional returns for companies in the defence, cybersecurity, energy and certain materials sectors. The unprecedented defence spending surge of the mid-2020s, driven by conflicts in Ukraine and the Middle East and rising tensions in Asia, has created one of the most significant investment themes of the decade.
How Wars Initially Impact Financial Markets
The immediate market reaction to geopolitical conflict is almost always negative. When Russia invaded Ukraine on 24 February 2022, European stock markets fell sharply, with Germany’s DAX declining over 3% on the day. Global risk appetite contracted. Safe-haven assets — US Treasury bonds, gold, the Swiss franc and the Japanese yen — surged. Oil prices jumped. This pattern of risk-off behaviour in the immediate aftermath of a conflict outbreak is consistent and predictable.
However, the duration and depth of the market decline depends critically on the scope of the conflict and its economic implications. Markets typically recover within weeks or months if the conflict is geographically contained and does not directly threaten major economic arteries. The Russia-Ukraine war was different because of its energy market implications for Europe, which extended the period of market stress and contributed to the worst year for both bonds and stocks in the developed world since the 1970s.
Defence Stocks: The Exception to War’s Market Damage
While broad market indices suffer during conflict escalation, defence stocks have been among the top-performing investments of the 2022-2025 period. The thesis is simple: governments increase defence spending during periods of elevated geopolitical risk, and defence companies are the primary beneficiaries of that spending increase. The visibility of future revenues — government defence contracts typically run for years or decades — provides investors with earnings certainty that is rare in other sectors.
Lockheed Martin’s shares have significantly outperformed the S&P 500 since Russia’s invasion. Northrop Grumman, Rheinmetall and BAE Systems have delivered extraordinary returns to investors who positioned themselves ahead of the defence spending surge. The SPADE Defense Index and various ETFs focused on the global defence sector have significantly outperformed broader market benchmarks during the period of elevated conflict. For investors who are comfortable with the ethical considerations of defence investment, the financial case has been compelling.
Cybersecurity Stocks: War’s Digital Dividend
Modern warfare has a significant cyber dimension, and the conflicts of the 2020s have dramatically raised awareness among both governments and corporations of the need for robust cybersecurity infrastructure. Companies including CrowdStrike, Palo Alto Networks, Fortinet, Booz Allen Hamilton and Palantir have benefited from increased government cybersecurity spending driven by the heightened threat environment. The SolarWinds attack, the Colonial Pipeline ransomware incident and the extensive Russian cyberwarfare campaign against Ukraine have all contributed to a significant and sustained increase in cybersecurity investment that shows no signs of moderating.
Energy Stocks and War
Oil and gas companies are historically among the beneficiaries of military conflict in oil-producing regions. The Russia-Ukraine war drove extraordinary profits for energy companies in 2022, with BP, Shell, ExxonMobil and Chevron all recording some of the highest profits in their histories as energy prices surged. Saudi Aramco, the world’s most profitable company, generated enormous revenues as Saudi oil exports commanded elevated prices. For investors, energy stocks provided both capital appreciation and significant dividend income during this period.
Gold: The Ultimate War Hedge
Gold has been a store of value during periods of geopolitical stress for millennia, and this relationship has held throughout the conflicts of the 2020s. Gold broke through the $2,000 per ounce barrier following the October 7 Hamas attacks on Israel and has traded at elevated levels throughout the period of Middle Eastern conflict escalation. Central banks, particularly those of emerging market countries seeking to reduce their dollar exposure, have been significant buyers of gold, providing structural support for the price beyond just the conflict risk premium.
Investment Risks in War Scenarios
Investing in conflict themes carries specific risks that standard financial analysis may not fully capture. Defence contracts can be cancelled, delayed or restructured. Regulatory and political restrictions on arms exports can disrupt revenue assumptions. ESG considerations are increasingly driving institutional investors away from defence stocks, potentially creating a structural headwind for valuations. And in the most extreme conflict scenarios — where nuclear use becomes a possibility — financial markets cease to function in any conventional sense, making investment analysis largely irrelevant. The appropriate investment response to major geopolitical conflict depends critically on one’s assessment of the conflict’s scope, duration and resolution pathway.