The escalation of conflict in the Middle East in 2026 has renewed concerns about global economic stability and has unsettled investor confidence. Conventional wisdom holds two ideas in an uneasy balance: (1) that war is, in general, ruinous for economies, but (2) that arms companies — unlike everyone else — always stand to gain from it. As anti-war activist Kurt Vonnegut and other anti-war voices have long cautioned, conflict breeds both devastation and the quiet suspicion that someone, somewhere, will always profit from it.
Yet, our recently published study of the world’s largest publicly traded arms-producing and military services companies shows that this assumption only captures part of the story. By comparing investor reactions to two major recent conflicts — the Russian invasion of Ukraine in February 2022 and the Hamas attack on Israel in October 2023 — we uncover a fundamental asymmetry in how financial markets reacted.
While the occurrence of geopolitical conflicts can have some global impact, stock markets react strongest to strategic policy changes, not simply to a military conflict itself. This finding has important implications for investors, suggesting that market-relevant information is contained primarily in government responses. Investors can therefore improve risk assessment and portfolio allocation by monitoring policy developments more closely. For scholars of financial markets and corporate finance, the results indicate that policy responses constitute a key transmission channel through which geopolitical shocks affect asset prices.
A Tale of Two Conflicts
Using an event-study methodology and drawing on stock-price data for the largest publicly traded arms companies from the SIPRI Top 100 – an established measure of the combined arms revenues of the world’s largest arms-producing and military service companies – we examine abnormal returns around both events.
In the case of Russia’s invasion of Ukraine, the pattern was both immediate and persistent. Arms-industry stocks recorded an average of 10 percentage points of cumulative abnormal returns in the first week, and these gains did not dissipate. European defense firms in the sample drove such results; one month after the invasion, such firms exhibited mean cumulative abnormal returns exceeding 20%.
Cumulative Abnormal Returns calculated from rolling alpha and beta
By contrast, following the surprise Hamas attack on Israel, the same arms-industry companies recorded no statistically significant abnormal returns at all (see figure). The event triggered intense Israeli military mobilisation, and widespread speculation about regional escalation in the Middle East, but none of these were reflected in the stock prices of global arms-industry stocks. Even US defense firms, which some commentators expected to benefit, did not move in a pattern resembling that of the European defense firms in the Ukraine event.
Why Ukraine Mattered for Financial Markets
Our explanation for the stark differences in reaction rests on public policy changes.
The Russian invasion of Ukraine jolted European governments into fundamentally rethinking their military capabilities, strategic dependencies, and budgetary commitments. Within days, several countries had drastically changed their stances towards military investment, with Germany standing out with a new 100 billion euros military fund. Several NATO members pledged to finally meet/exceed the 2% of GDP defense-spending target; EU countries (Finland and Sweden) accelerated their accession to NATO.
For global defense firms with deeply rooted European presence, this represented a structural break from long standing military expenditure policies. Financial markets realized that this policy shift would recalibrate the entire defense spending landscape, ensuring that European companies would get the lion’s share. Our results confirm this: more than 70% of the European arms companies in our sample had higher returns than the median non-European ones.
By contrast, the Israel–Hamas conflict did not trigger any substantial strategic realignment beyond the immediate parties involved. Israel is the world’s 15th-largest military spender, representing roughly 1% of global defense expenditure; even a full mobilisation of its war economy has relatively limited implications for global defense-industry revenues. Most importantly, no major government vowed to reorient its defense policy in response to the attack. The conflict, though tragic and geopolitically consequential, did not alter NATO posture, EU procurement priorities, or broader military-spending trajectories.
In short: The Russian invasion forced a continent to change course. October 7 did not.
What We can Learn from It
This insight has two broader implications.
1. General narratives (such as “war drives returns”) are often too simplistic
The comparative perspective of our study exposes flaws in a widespread belief: that defense companies reliably benefit from conflict. Our findings show that this is only intermittently true and heavily context-dependent. Indeed, within our sample, there are companies (e.g. Boeing etc) that had raw negative cumulative returns ranging from -1% to – 7.5% during the Russian invasion of Ukraine, an event that shows substantial positive returns as highlighted earlier. This goes to show that context matters more than general narratives.
2. Investors need to consider alternative strategies beyond conventional geopolitical-risk metrics
We show that conflict itself is an unreliable predictor of returns in the defense sector. Instead, investors must monitor the alignment between geopolitical events and institutional or budgetary inflection points. Only conflicts that prompt governments to rewrite longstanding commitments generate the kind of durable abnormal returns observed after February 2022.
For law and finance scholars, this highlights the importance of understanding how political commitments and existing legal limitations shape sector-specific valuations. For investors, it underscores that increased geopolitical risks can, sometimes, provide the most valuable investment opportunities.
Fatjon Kaja is a Post-Doctoral researcher at the Center for Advanced Studies on the Foundations of Law and Finance at Goethe University Frankfurt and a Research Affiliate at SAFE.
Kevin Foster is Associate Dean of the Colin Powell School for Civic and Global Leadership at The City College of New York – CUNY.
Blog entries represent the authors‘ personal opinion and do not necessarily reflect the views of the Leibniz Institute for Financial Research SAFE or its staff.
