The uncomfortable truth about markets, conflict, and opportunity
War feels like the kind of event that should send markets into freefall. Images of conflict, geopolitical tension, and economic uncertainty naturally lead investors to expect chaos.
And yet, history tells a far more nuanced — and at times counterintuitive — story.
With tensions once again rising in the Middle East, investors are asking a familiar question: what actually performs well during war? More importantly, is there a reliable playbook — or is that just another market myth?
Let’s unpack what the evidence really shows.
Markets Don’t Behave How You Think
The first thing to understand is that wars rarely have a lasting negative impact on stock markets as a whole.
Multiple studies show that markets tend to fall initially when conflict breaks out, but often recover quickly — sometimes even before the conflict ends.
That’s because markets are forward-looking. Once uncertainty begins to resolve — even slightly — prices adjust rapidly.
In fact, recent events highlight this perfectly. Despite escalating tensions involving Iran, global equity markets have remained resilient and even approached record highs as investors anticipate a resolution.
So the key takeaway is this:
War creates volatility — not necessarily long-term destruction of equity value.
The Sectors That Tend to Benefit
While the broader market may prove resilient, certain sectors consistently stand out during periods of conflict.
1. Defence and Aerospace
This is the obvious one — and broadly speaking, it’s grounded in reality.
Rising geopolitical tensions lead to increased government spending on military equipment, intelligence systems, and defence infrastructure. That spending tends to be long-term and contract-driven, which provides visibility on earnings.
Research shows defence companies often generate positive abnormal returns following major conflicts, reflecting expectations of sustained military expenditure.
There’s also evidence of outperformance in real-world data. UK defence stocks, for example, have historically delivered stronger short-term returns than the wider market during conflicts.
More recently, defence ETFs and major contractors have surged amid rising tensions, with some gaining over 30% since early conflict escalation phases.
But — and this is important — the story isn’t as simple as “war equals profits.”
A 2025 study found defence stocks rose significantly after the Russia-Ukraine invasion, but showed no meaningful reaction to the Hamas attack on Israel.
In other words, context matters. Markets often price in conflict before it happens.
2. Energy and Commodities
If there’s one sector that reacts immediately to war, it’s energy.
Conflicts — especially in regions like the Middle East — disrupt supply chains and create fears of shortages. That drives oil and gas prices higher, which feeds directly into profits for energy producers.
Historically, commodity prices can spike dramatically during wartime, sometimes by 50–200% depending on the severity of disruption.
The Ukraine war is a recent example, where energy stocks significantly outperformed as oil and gas prices surged.
However, this trade can reverse quickly. As soon as supply fears ease, prices — and profits — can fall just as fast.
3. Gold and “Safe Haven” Assets
War increases uncertainty — and uncertainty drives demand for safety.
Gold has historically been a go-to asset during geopolitical crises. It benefits from:
- Currency instability
- Inflation fears
- A general “flight to safety”
Alongside gold, government bonds (particularly from stable economies like the US or UK) often see inflows during periods of conflict.
That said, bonds are not a guaranteed winner. War can also increase government borrowing, which can push yields higher and prices lower over time.
4. Dividend Stocks and Defensive Businesses
One of the more overlooked winners during conflict is the humble dividend stock.
Recent market data shows dividend-paying companies outperforming broader indices during geopolitical stress, offering both income and relative stability.
These are typically businesses with:
- Stable cash flows
- Strong balance sheets
- Essential products or services
Think consumer staples, healthcare, and utilities — not flashy, but reliable.
The Sectors That Struggle
Not every part of the market benefits.
Travel and leisure stocks, for example, tend to fall sharply during conflict due to disruption and uncertainty. Airline shares often decline almost immediately when tensions escalate.
Similarly, highly cyclical sectors and consumer discretionary businesses can suffer as confidence weakens.
The Big Myth: “Just Buy Defence Stocks”
There’s a persistent belief that the simplest way to profit from war is to buy defence companies.
The reality is more nuanced.
Yes, defence stocks often perform well — but frequently before the war becomes front-page news. Markets anticipate increased spending long before missiles are launched.
By the time retail investors act, much of the upside may already be priced in.
There’s also variability:
- Some conflicts trigger strong defence stock rallies
- Others produce muted or no reaction
- In certain cases, stocks even fall initially due to broader market risk-off sentiment
Even when defence stocks do rise, the long-term returns are not always extraordinary. Data shows that while aerospace and defence sectors may gain around 10% over six months after conflict, the long-term (12-month) picture can be far more mixed.
So while defence is a logical winner, it’s not a guaranteed or easy trade.
What Really Drives Performance
If there’s one overarching lesson, it’s this:
War itself is not the primary driver of market returns — earnings are.
Even during conflict, companies that continue to grow profits tend to perform well, while those that don’t fall behind.
Markets are not moral systems. They are pricing mechanisms.
They respond to:
- Government spending
- Supply shocks
- Inflation expectations
- Interest rates
- Corporate earnings
War simply acts as a catalyst that influences these factors.
So What Should Investors Do?
The temptation during periods of geopolitical tension is to react — to reposition portfolios, chase “war trades,” or try to anticipate the next move.
History suggests that’s rarely the winning strategy.
Yes, certain sectors — defence, energy, commodities — often benefit in the short term. Safe havens like gold can provide protection. Dividend stocks may offer stability.
But the bigger picture is clear:
Markets are remarkably resilient.
They recover faster than expected.
And long-term returns are driven by fundamentals, not headlines.
War creates fear, and fear creates opportunity — but not always in the ways investors expect.
The idea that there’s a simple playbook for investing during conflict is appealing. It’s also misleading.
The investors who tend to come out ahead aren’t the ones chasing the obvious trades. They’re the ones who stay disciplined, focus on long-term trends, and understand that even in the darkest moments, markets are already looking ahead.
And that, more than anything, is what makes investing during war so counterintuitive.
Carl Roberts, Director
If you want to learn more about this topic, please find the link here.
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Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
