Shares of XAR slid -3.1% to $262.75 on March 19 as a hawkish Federal Reserve and spiraling oil prices collided to punish even the defense sector—a corner of the market that, in theory, should benefit from war. The drop extends a volatile stretch, with the ETF now 11% below its 52-week high of $295.39 and underperforming the broader S&P 500's -0.7% decline on the day.
• The Fed Slammed the Door on Near-Term Rate Relief. The Federal Reserve held rates at 3.5%–3.75% , and the dot plot pointed to just one cut this year and another in 2027 . Powell "pushed back on the idea of near-term rate cuts and sounded a bit more hawkish regarding the outlook for inflation." For XAR's holdings—companies like Lockheed Martin and L3Harris that rely on long-duration government contracts—higher-for-longer rates raise the cost of borrowing to fund production and compress the present value of future cash flows. The ETF trades at a P/E ratio of 61.14 , a lofty valuation that becomes harder to justify when risk-free yields stay elevated.
• Oil Above $112 Is Feeding Inflation Fears That Stall Everything. Brent rose 4.39% to $112.09 a barrel on Thursday after an Israeli strike on Iran's South Pars gasfield prompted Iranian attacks on energy facilities in Qatar, Saudi Arabia, and the UAE . The U.S. producer price index jumped 0.7% last month—more than double the 0.3% economists expected—with annual PPI inflation hitting 3.4% . Hotter inflation makes rate cuts even less likely, and rising fuel costs directly eat into aerospace manufacturers' margins through higher titanium smelting, logistics, and transport expenses.
• A Trillion-Dollar Pentagon Budget Can't Shield Against Macro Gravity. Congress passed an $839 billion defense spending bill in February, $8 billion above the Pentagon's request , and Trump has floated a $1.5 trillion defense budget for fiscal 2027 . The Pentagon plans to spend all $152 billion in reconciliation funding in fiscal 2026 . Yet even this spending spree hasn't insulated XAR: the fund's equal-weight structure, which tilts toward small- and mid-cap growth stocks (~52% of assets) , makes it more sensitive to rising rates than cap-weighted defense peers.
• The War Premium Is Real—But Priced In at a Steep Multiple. XAR returned 67.9% over the past year , pricing in geopolitical conflict and budget growth. Yet recently, "defense stocks aren't rising despite all the fighting."
KPMG now expects the Fed to hold off on cuts until September . Until oil stabilizes and rate expectations reset, XAR shareholders face a market that rewards the defense thesis on paper but punishes the sector's valuations in practice.