Shares of the SPDR S&P Aerospace & Defense ETF (XAR) jumped +3.2% to $267.08 on Monday as Wall Street staged a dramatic reversal after President Trump postponed strikes on Iranian energy infrastructure for five days. Trump put his threat to destroy Iranian power plants on hold after what he described as "productive" talks, sending oil down sharply and stocks soaring.
Iran responded by saying there had been no direct talks, calling the move an attempt to lower energy prices. Investors are betting on peace, but the diplomatic picture remains dangerously murky.
• Oil's Plunge Is the Real Catalyst for This Rally. West Texas Intermediate crude fell as much as 14%, sliding to around $89 a barrel. Lower oil pulls down inflation expectations, which in turn makes the Federal Reserve more likely to cut interest rates — a direct tailwind for rate-sensitive industrials like the companies inside XAR. The move reflected a will to de-escalate the conflict as soaring energy prices risked stagflation and triggered a surge in Treasury yields. For XAR shareholders, cheaper energy means lower input costs for manufacturers and more investor appetite for stocks over bonds.
• Defense Budgets Keep Growing Regardless of Diplomacy. President Trump announced plans to increase the defense budget to $1.5 trillion for 2027 — about $500 billion over 2026 spending levels.
Lawmakers are already mulling a $50 billion supplemental to pay for U.S. strikes on Iran. XAR's top holdings — Lockheed Martin (4.09%), Northrop Grumman (3.89%), and L3Harris (3.84%) — sit at the front of this spending pipeline. War or peace, the money is flowing.
• The Bounce Hasn't Erased a Brutal Week. At $267.08, XAR is still below where it closed last Monday at $273.76 and well off its 52-week high of $295.39. Major benchmarks had logged four consecutive weeks of declines before today's relief rally. The ETF trades at a price-to-earnings ratio of 63.44 — a steep premium that demands sustained earnings growth, not just one good headline.
• Five Days Is Not a Peace Deal. It's still not clear when the Strait of Hormuz, through which roughly 20% of global oil flows, will reopen.
Goldman Sachs expects Brent to average $110 in March and April. If talks collapse by Friday, oil spikes back, inflation fears return, and today's gains vanish. Shareholders are essentially trading a possibility of de-escalation, not a certainty.
The bottom line: XAR is riding a relief rally fueled by falling oil, not by any fundamental resolution of the conflict that created the volatility in the first place. The defense spending backdrop is rock-solid, but at a P/E above 63, the ETF is priced for perfection in a world that's delivering anything but.