US Defense Stocks Take Epic Fury Beating, Leaving UBS Asking Why

Despite the launch of Operation Epic Fury against Iran in late February, U.S. defense stocks have moved lower rather than higher, prompting a UBS analyst to pen a note to clients this week attempting to answer why the makers of missiles and tanks failed to sustain a wartime rally.

Analyst Allyson Gordon asked the question: “Why Is US Defense Performance Lackluster?” 

Let’s start with iShares U.S. Aerospace & Defense ETF, or ITA, a basket of major U.S. defense firms. ITA caught an early bid in the first phase of Operation Epic Fury, but the rally failed to hold shortly after that. By late March, the fund was down nearly 16%. The fund has since rebounded in recent sessions, trading around $223 on Thursday morning, but the defense complex’s inability to sustain a war-driven rally caught investors off guard.

Gordon provided her take on why defense stocks has underperformed during the first month of the conflict:

Defense is one of the more asked groups on “lack of outperformance” in the wake of the Middle East conflict – I think a lot is in part a function of a high starting point with a ton of money piling into Defense at the end of 2025/start of 2026 on geopolitical tension and budget optimism, along with these being non-AI/non-cyclical big cap stocks attached to a good theme (i.e. exposure diversification). 

Now, there are also questions on midterms and supplemental. I still sense investors holding on but poor performance is forcing some cautious sentiment creep. RTX is the one investors are fighting the hardest on the recent lag.

She added:

Trading Color: Clear de-risking. Initially saw a rush of demand to start the year, but now the desk is much better for sale especially from the Long Only community. Most skewed in RTX, Lockheed Martin, Lam Research and Parsons.

In a separate note, Melius analyst Scott Mikus saw an opportunity in the sliding shares of RTX, formerly Raytheon Technologies Corporation. He upgraded the stock to “Buy” from “Hold” on the basis of “Epic Fury tailwinds.”

Mikus said, “Given the need to replace missiles, missile interceptors, damaged radars, aircraft, and other equipment used in Operation Epic Fury, we are raising our estimates and price targets for the large defense primes.”

“We see margin tailwinds for defense contractors as they move past stale-priced contracts and receive awards for mature production programs that are margin accretive,” added Mikus.

The lingering question is how defense stocks will hold up as the Trump administration looks for an off-ramp to wind down the Iran operation, especially with U.S. gasoline prices now averaging above the politically sensitive $4-a-gallon level.