The current defense industry rally and the reality behind it
US defense stocks have jumped significantly since the war started in Iran, as the market quickly priced in the fact that military stockpiles deplete rapidly during a conflict and need to be replenished. In these situations, governments tend to lock in the production capacities of defense companies for years in advance. This gives the sector predictable revenue for years to come. It’s no coincidence that one of the largest US defense ETFs, ITA, had already achieved a YTD return of over 12% by mid-March 2026. Barron’s also reported that several major defense stocks saw meaningful jumps in the days following the recent US strikes.
The market is now pricing in the rapid depletion of interceptor missiles needed for air defense systems, while their replacement is slow. Therefore, larger orders could be coming in the next few years. According to Reuters, Lockheed Martin received a $9.8 billion contract in September 2025 for 1,970 PAC-3 MSE interceptors, and we also know from US budget documents that the price of one such interceptor is roughly $4 million. This in itself indicates that replenishing the stockpile of just a single system can be a multi-billion-dollar expense.
However, it’s not just about how many new orders come in, but also how quickly stockpiles can be replenished. Reuters also notes that in January 2026, Lockheed Martin signed a seven-year agreement aimed at increasing the annual production capacity of PAC-3 missiles from around 600 to 2,000. At first glance, this seems like a massive ramp-up, but in reality, it mostly just shows how small the previous capacity was, especially with multiple active conflict zones currently around the world.
The most critical question today is the cost ratio between the parties to the conflict
A fundamental problem with modern air defense is that against cheap offensive weapons, the other side can often only defend itself with much more expensive interceptors. According to estimates by the London-based RUSI, the cost of an Iranian Shahed-136 drone is only around $20,000 to $30,000, meaning these devices are incredibly cheap. And it’s important to realize that the power of these drones doesn’t primarily lie in their technological capability, but in the fact that they can be produced cheaply and are available in massive numbers.
Defending against drones, however, operates on a completely different and exponentially higher cost level. According to Reuters, the price of a PAC-3 MSE missile is roughly $4 million, while US budget documents also reveal that the more sophisticated THAAD interceptor costs around $12.7 million. So, we can see that against a twenty- or thirty-thousand-dollar drone, defense systems costing millions, or even tens of millions, often have to be deployed.
This, of course, doesn’t mean it’s an unnecessary expense. According to the CSIS, it’s not enough to simply compare the drone’s price to the interceptor system’s price, because the defense system usually protects very expensive and critical targets, such as airports, cities, ports, or military bases. If these take a hit, the damage can often be many times the price of the interceptor missile. But the structural problem still remains that if one side can attack cheaply in large quantities, but the other side can only repel these attacks at a very high cost, the sustainability of the defense quickly turns into a problem of financing and production capacity.
The Iranian side’s strategy is built on cost disparity
In many cases, we don’t know the exact unit prices for Iranian weapons, so we can only talk about estimates here. With drones, this uncertainty is smaller, as multiple sources cite the cost of a Shahed in a range similar to the one mentioned earlier. With ballistic missiles, however, the variance is much larger. Based on estimates by the Asia Times, the price of certain Emad variants could be around $250,000, while the Ghadr system might hover around the $5 million mark. These numbers should be taken with a grain of salt, but the differences between the costs of the two sides are noticeable here as well.
For the more advanced, hypersonic Iranian systems, there is even less reliable public data. What can be said for sure, though, is that these are no longer cheap systems, even for the Iranian side. Therefore, a logical strategy for Iran would be to first overwhelm the defense systems with cheaper weapons, and then, once those stockpiles are depleted or the system becomes overloaded, deploy its more expensive, harder-to-intercept, more precise, and highly destructive weapons. And this poses a serious risk to the other side.
The problem of slowly replaceable stockpiles
The most painful realization of the current crisis is that weapon stockpiles are depleting at a rate faster than anyone would have thought. The Financial Times is already openly stating that when planning Iranian operations, the West must take into account its own air defense limitations, because interceptor missiles run out fast and manufacturing replacements is agonizingly slow. Moreover, this doesn’t just cause problems in the Middle East, as in the event of a potential conflict in Taiwan or another future conflict, this lack of capacity could be fatal.
The US THAAD system is a particularly good example of this, as estimates from the Congressional Research Service suggest that replenishing stockpiles could take anywhere from three to eight years. If the accumulated reserves are burned through in a short period during an intense war, they cannot be replaced in just a few months. The wars of the future will therefore no longer be decided solely by technological superiority, but also by the size of stockpiles, the unit cost of weapons, and the speed of production capacity.
This problem could backfire in future conflicts too
Stockpile depletion in the Middle East is particularly sensitive because the reserves used here by the US and its allies could be missing in other future conflicts. Investing.com reported in November that Taiwan complained about repeated delays in US arms deliveries, and the handover of 66 F-16Vs was also pushed back due to production and supply chain issues. On top of this comes the fact that the United States has also begun to rapidly consume its own weapon stockpiles during the Iran conflict, and, obviously, it will prioritize replenishing its own reserves first.
This is also important because Taiwan is under immense pressure from China, and in a military conflict it wouldn’t matter how many orders had been placed; all that matters is what is actually deployable, how much it costs, and how fast it can be replaced. The Financial Times draws the same conclusion: the current events in the Middle East show how brutally disproportionate costs can become when an expensive defense is hit by massive, cheap attacks. And if nothing changes, the exact same scenario would repeat itself in Taiwan or any other future theater of war.
In the medium and long term, the defense industry must become cheaper and more cost-effective
From this, I think the logical conclusion is that the success of the defense industry in the coming years will depend on cost-effectiveness, and it absolutely must shift in this direction. Naturally, high-end, extremely expensive systems will still be needed to counter more serious threats, like ballistic and hypersonic missiles. But against cheap drone swarms, the current Western defense model is simply unsustainable in the long run. If shooting down twenty-thousand-dollar targets requires four-million-dollar interceptors, the intercepting party becomes a prisoner of its own costs.
This is why the innovations reported by Reuters are interesting, since Ukrainian manufacturers are now building drone interceptor systems priced around $1,000 to $2,000, targeting exactly the category in which Western missiles are currently too expensive. Obviously, these systems won’t replace every traditional air defense system, but they clearly show where the market might be heading. The winners of the future won’t be those who can only manufacture the best technology at an exorbitant price, but those who can offer multi-layered, cheaper defense solutions that can be produced rapidly in large numbers.
The most important message of the current conflict is therefore that the economic reality of modern warfare is forcing the sector into a completely new, cost-sensitive era. There is a growing demand to manufacture more, faster, and much more cost-effectively. And this is a hard-line strategic imperative, because if the Western defense industry cannot adapt to this new logic, the same problem will return even more severely in future conflicts, where the stakes may be even higher.
The author of this article is Marcell Kovács, a student at Mathias Corvinus Collegium (MCC).
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