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Israeli army M109 155mm self-propelled howitzers are deployed near the border with Gaza in southern Israel on Oct. 12.JACK GUEZ/AFP/Getty Images

Gus Carlson is a U.S.-based columnist for The Globe and Mail.

It’s one of the harshest and hardest-to-swallow realities of war: For some sectors of the economy, armed conflict drives value.

In the days following the Hamas attacks on Israel, shares of major U.S. defence companies soared, adding more than US$23-billion to the sector’s market capitalization, as investors looked to them as harbingers of increased arms spending by governments in the event of a prolonged conflict.

Among the most active earlier this week: Lockheed Martin Corp. LMT-N, which makes the F-35 Lightning II fighter jets used by the Israel military, as well as Sikorsky and Black Hawk helicopters; Northrop Grumman Corp. NOC-N, which makes submarines and combat vehicles; RTX RTX-N; General Dynamics Corp. GD-N and Boeing Co. BA-N. Together, shares of these and similar companies in the sector rose by an average of 6.5 per cent. Northrop Grumman led the pack, surging more than 11 per cent.

Call them sin stocks or warmonger investments – or even necessary evils. Whatever the label, defence-related stocks are a divisive force in the psyche of the markets: despised by environmental, social and governance investors, but embraced by investors who see their value in a world wracked by geopolitical unrest, where military solutions are often seen as the most appropriate and effective response, especially when terrorism is involved.

The ethical dilemma around capitalizing on the inflationary nature of war and the value it generates for investors in arms makers and energy companies is difficult for many people to square.

Critics would ask how hardened must investors’ humanity be to reconcile the drive for profit with the heartbreaking reports and images coming out of Israel of civilians being beaten and killed, particularly children and infants.

Yossi Klein Halevi: As Israel is reborn, it faces terrifying options

Advocates would counter that war and the atrocities of terrorism are a real, if sad, fact of modern life – and they are simply opportunists benefiting from society’s might-makes-right posture and the predilection to use violence as a solution. That, and the fact there is money to be made – discretionary spending by the U.S. Department of Defense is expected to surpass US$1-trillion within two years.

In some ways, the gut punch felt by critics of defence stocks this week is similar to that when sales of firearms – especially automatic assault weapons – rise after all-too-common mass shootings in the United States, particularly at schools, where young students are the victims. While the sentiment driving the sales spike in those cases is about gun advocates’ fear that such shootings will prompt tighter gun-control laws, the market dynamic is the same as war: Violence, and the uncertainty it creates, drives the commercial activity.

To be sure, for every uptick in the value of defence-related companies created by war there is a corresponding downtick for others. For example, shares of global hospitality companies such as Marriott International Inc. MAR-Q fell in the days after the attacks.

Major U.S. commercial air carriers such as Delta Air Lines DAL-N, United Airlines Holdings UAL-Q and American Airlines Group AAL-Q also took a hit on renewed fears of global travel restrictions and the threat of terrorist attacks. In the U.S. in particular, the actions – and atrocities – of Hamas rubbed the scab off memories of the terrorist attacks on Sept. 11, 2001 and the disruption that ensued in their aftermath.

For arms makers and their investors, the dispassionate bottom-line question is whether or not the spike up prompted by the conflict in Israel will be a momentary blip or a more sustained run-up if there is a longer and perhaps broader war that spreads to neighbouring nations and beyond?

On a bigger scale, the prospect that the world’s superpowers will weigh in or be dragged in fuels a somewhat ghoulish proposition: For the defence industry, the longer and more widespread the war, the greater the opportunity.

There are several signs the conflict might grow. Israeli Prime Minister Benjamin Netanyahu has said the war will be “long and difficult.” U.S. President Joe Biden has promised additional U.S. military assistance to Israel, including ammunition and interceptor missiles used to counter incoming warheads widely used in a ground war, and has already sent the first planeload of supplies. On Thursday, the U.S. Navy’s newest and most advanced warship, the USS Gerald Ford aircraft carrier, arrived in the Mediterranean with a mission to deter further attacks on Israel.

While the conflict in Israel is a no-win situation for so many, it is a win – at least financially – for a few. There’s no question it is a struggle to make sense of the dichotomy as the tragedy unfolds for all to see, but it is the unvarnished truth of a free and open market.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 23/02/24 4:00pm EST.

SymbolName% changeLast
LMT-N
Lockheed Martin Corp
+0.52%431.12
NOC-N
Northrop Grumman Corp
+1.3%461.1
GD-N
General Dynamics Corp
+0.52%273.75
BA-N
Boeing Company
-0.33%200.83
MAR-Q
Marriot Int Cl A
+0.87%251.48
DAL-N
Delta Air Lines Inc
-0.71%41.72
UAL-Q
United Airlines Holdings Inc
+0.55%45.51
AAL-Q
American Airlines Gp
-0.72%15.13

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