In a year where geopolitical tremors feel more frequent than market pullbacks, investors are once again reexamining the link between global instability and the pricing of key strategic sectors—namely, oil and defense. From drone strikes in the Red Sea to diplomatic escalations between Iran and Israel, and from the South China Sea standoff to cyber warfare in Eastern Europe, 2025 is proving that risk is not merely a news headline—it’s an equity catalyst. But the market’s reaction isn’t monolithic. Oil majors and defense contractors may both thrive in uncertain times, yet the underlying forces driving their valuations diverge. One is fueled by supply shocks and global energy diplomacy; the other by procurement pipelines, deterrence cycles, and kinetic conflict simulations.
This divergence becomes clear when comparing two market icons: Lockheed Martin and Saudi Aramco. Both are deeply embedded in the machinery of global security. One builds advanced weapon systems that governments can’t do without. The other supplies the crude oil that still powers over 80% of global transport and industrial demand, despite two decades of climate rhetoric. Yet each responds differently to the same headline, reflecting investor perceptions of duration, risk transmission, and policy buffers.
Take the most recent flare-up in the Strait of Hormuz. After a series of naval altercations between U.S. and Iranian vessels in late April, crude oil futures spiked briefly to $98 per barrel, only to retreat within days as diplomatic backchannels took over. Aramco’s ADRs ticked up, then flatlined. Lockheed, however, sustained a 4.3% rally over the same two-week period. Why? Because investors see oil disruptions as temporary—and increasingly cushioned by strategic reserves and alternative routes—whereas arms contracts, once signed in response to a crisis, tend to stick.
This discrepancy is structural. The modern energy market has learned to bake in transitory Middle East disruptions. Thanks to diversified supply chains, shale production buffers, and increasing LNG interconnectivity, crude’s geopolitical premium is both smaller and shorter-lived than it was two decades ago. Meanwhile, defense stocks are entering what analysts at Barclays call a “secular security supercycle,” fueled not only by traditional war risks but by the rise of cyber threats, drone swarms, and AI-enabled defense systems. Every new confrontation is not just a trade—it’s an RFP waiting to happen.
And the numbers tell the story. According to SIPRI, global military spending surpassed $2.4 trillion in 2024 and is on pace to exceed $2.6 trillion by the end of 2025. The U.S. defense budget alone has grown 9% year-on-year, with procurement for advanced air, missile, and space systems driving the lion’s share of increases. Lockheed Martin, Raytheon, Northrop Grumman—all have issued guidance upgrades since Q1. Notably, Lockheed’s backlog crossed $160 billion, supported by fresh orders from NATO-aligned countries and new missile defense systems in the Indo-Pacific.
Contrast that with Saudi Aramco, which, despite being one of the most profitable companies on Earth, operates under a shadow of policy risk and a world increasingly uncomfortable with fossil fuels. True, its dividends remain massive. True, it remains central to OPEC+ policy and can move barrels like few others. But the energy transition narrative hangs over its long-term valuation. Western institutional investors continue to face ESG pressures. Despite rising oil prices in moments of tension, Aramco trades at just 12x forward earnings—less than half the multiple of many U.S. defense firms. Its geopolitical exposure is seen as double-edged: both a source of pricing power and of regional vulnerability.
Energy transition pressures also distort how oil stocks digest conflict. In the past, war in the Middle East might have sent Brent crude up 30%, with oil majors tagging along. Today, even major outages are treated as noise unless they threaten long-term infrastructure. Analysts increasingly argue that geopolitical shocks need to translate into actual supply disruptions—not just headlines—to sustainably move oil equities. That’s a tough bar in 2025’s interconnected oil world.
Defense stocks are a different animal. War—whether hot or cold—doesn’t need to escalate to drive up the sector. Deterrence theory means that even posturing, wargaming, and diplomatic fallout can lead to spending commitments. The recent U.S.-Taiwan defense partnership package, valued at $10 billion over five years, emerged not from direct combat but from simulated conflict scenarios and “gray zone” cyber threats. Lockheed’s stock responded accordingly, climbing 5.6% on the news.
And those scenarios are becoming more sophisticated. The Department of Defense and allied intelligence agencies are now using AI-based wargaming to model potential escalations from the Arctic to the Indo-Pacific. These simulations don’t just prepare militaries—they influence budgets. Goldman Sachs recently published a note highlighting how defense contractor earnings now correlate more with scenario-based policy shifts than with kinetic conflict itself. As the report puts it: “In an AI-enabled strategic environment, perception can be a trigger as powerful as reality.”
So how should investors interpret this split narrative?
First, understand that geopolitical risk is no longer priced uniformly across sectors. Energy names may see short bursts of premium during conflict, but unless those events result in physical infrastructure damage or prolonged outages, the upside may fade quickly. Defense, by contrast, has transitioned into a long-cycle investment theme, increasingly decoupled from the headline cycle and more tied to systemic rearmament.
Second, consider the geographic angle. European defense names like BAE Systems and Dassault Aviation have outperformed even their U.S. peers in 2025, fueled by the rearmament of NATO and regional anxieties over Russian military posturing. Meanwhile, Middle Eastern oil equities, despite record revenues, continue to face valuation headwinds from ESG aversion and concerns over long-term demand curves. Even within the oil space, U.S. shale names like Pioneer and Devon Energy are increasingly favored for their agility and policy insulation.
Third, recognize that investors are refining their playbooks. In past decades, geopolitical risk meant buying oil futures and defense stocks in parallel. Now, more nuanced strategies are emerging. Funds like Bridgewater and Citadel are reportedly using option-based volatility plays around geopolitical events, focusing on defense contractors as core positions and treating oil exposure more tactically—through futures, spreads, or cross-commodity arbitrage.
Fourth, keep an eye on the war-gaming ecosystem. It’s no longer just a Pentagon affair. Investment banks, think tanks, and even asset managers now conduct their own geopolitical scenario modeling. Some funds have begun integrating defense simulation data into their macro models, using machine learning to forecast market stress responses based on probabilistic conflict pathways. This shift reflects a broader truth: in a volatile world, the ability to model disruption is becoming as important as the ability to predict returns.
Ultimately, pricing geopolitical risk is as much about investor psychology as it is about earnings models. The difference between Lockheed Martin and Saudi Aramco is a matter of perceived permanence. Oil shocks are fleeting; defense budgets stick. The market senses this—and rewards accordingly.
Yet, caution is warranted. Defense names may be rallying now, but they are not immune to drawdowns, particularly if peace breakthroughs or budgetary realignments occur. Similarly, oil stocks could rally hard if a major conflict hits key infrastructure. The right portfolio isn’t one that bets only on conflict—it’s one that understands how different forms of disruption flow through different asset classes.
In 2025, the age of geopolitical tailwinds is not hypothetical. It is happening now—factored into every procurement contract, every commodity futures curve, and every investor calculus. The key is knowing what’s real, what’s reactive, and what’s reflexive. Because in markets, as in geopolitics, perception often writes the first draft of reality.
