Friday's U.S. drone strike at Baghdad International Airport, which killed a key Iranian military commander, sent markets tumbling and defense-contractor shares climbing.
Shares of Lockheed Martin (LMT) - Get Lockheed Martin Corporation Report, Raytheon (RTN) - Get Raytheon Company Report, General Dynamics (GD) - Get General Dynamics Corporation Report, Northrop Grumman (NOC) - Get Northrop Grumman Corporation Report and Kratos Defense & Security (KTOS) - Get Kratos Defense & Security Solutions, Inc. Report were climbing 1% to 3% following the attack, which killed Maj. Gen. Qassim Soleimani, leader of the Quds Force of the Islamic Revolutionary Guard Corps, and officials from several Iraqi militias.
Northrop Grumman shares saw their biggest surge in five months.
Soleimani was a veteran of the Iran-Iraq war and had been sanctioned by the U.S. since 2007. The Pentagon said he had orchestrated attacks on coalition bases in Iraq over the past several months, including the recent killing of an American contractor.
“This strike was aimed at deterring future Iranian attack plans,” the Pentagon statement said. “The United States will continue to take all necessary action to protect our people and our interests wherever they are around the world.”
A 2021 Pentagon budget request had been expected to show flat or declining defense purchases over the next several years, but increasing unrest could change things rapidly.
Citigroup analyst Jonathan Raviv said in a note to investors that tension in the Middle East "could change the 2020 defense conversation" and "it could be tougher for Democratic Party electoral candidates to argue against a stronger defense budget in 2020."
“As is always the unfortunate case, defense stocks tend to benefit from perceptions of heightened risk and the potential for geopolitical conflict,” Raviv said.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said Iran's military reach via proxies across the Middle East gives the leadership plenty of options
These include retaliatory assassination attempts, kidnappings, bombings of U.S. government facilities, and attacks on shipping and other privately owned U.S. entities.
"Iran might also seek to draw Israel into a conflict via Hezbollah in Lebanon," he said. "We can't rule out some sort of grand-scale attack, but an array of smaller-scale activity is our core bet."