The history of growth in the U.S. stock market is behind a history of American wars.

Writing by: Li Jia

Source: Wall Street Insights

When gunfire erupts, gold flows freely. Amid market discussions on whether Middle East conflicts will drag down the global economy, the S&P 500 and Nasdaq indices both hit new highs again. What does war really mean for U.S. stocks?

Caitong Securities reports a straightforward answer: war and a prolonged bull market in U.S. stocks are not opposites but more like symbiotic. The historical performance of the Dow Jones Industrial Average confirms this—rising 28% during the Spanish-American War, 26% during the Korean War, and even after 19 years of the Vietnam War, the index still gained over 80%. The Afghanistan war, spanning around the 2008 financial crisis, nearly doubled during that period.

Since becoming the world’s largest economy at the end of the 19th century, the U.S. has gained substantial benefits from most wars, except the Vietnam War. From seizing Spanish colonies during the Spanish-American War, profiting from World Wars I and II, to the Gulf War and subsequent small-scale conflicts over oil resources, the U.S. has transitioned from “war participant” to “war initiator.”

The reaction of U.S. stocks amid gunfire is also clearly traceable: before World War II and earlier, wars mainly impacted markets through emotional shocks; starting with the Korean War, this direct effect gradually weakened, and wars more often transmitted through economic channels such as inflation, oil prices, and fiscal deficits to the stock market.

Vietnam was the only war where the U.S. suffered losses, and it profoundly rewrote its war logic. Since then, U.S. conflicts have almost invariably featured three characteristics: short duration, limited scope, and centered around oil—ultimately achieving their objectives.

From “looting during chaos” to proactively provoking conflicts, U.S. war strategies have undergone three major shifts:

The Spanish-American War in 1898 was the first major war initiated by the U.S. It was driven by domestic monopolist conglomerates eager for new markets, investment opportunities, and raw materials, with the remaining Spanish colonial empire as the prime target. After the war, the U.S. gained control of Cuba and acquired the Philippines, Guam, and Puerto Rico. The Dow Jones Industrial Average rose 28% during the three months of the war, aligning with battlefield victories.

When World War I broke out, the U.S. initially maintained neutrality. By July 1914, investors realized that the U.S. would become the biggest beneficiary of the European conflict—its homeland, far from the battlefield, could continue producing and exporting arms to Europe. By 1917, American banks, including J.P. Morgan, had extended $10 billion in loans to Britain and France for weapon purchases. Despite stock indices dropping nearly 10% after the U.S. officially entered the war in April 1917, the industrial index had already risen about 107% from its lowest point in 1914 to March 1917.

World War II was the key event that established the U.S. as a global hegemon. At the war’s start in September 1939, U.S. stocks initially declined due to “excess profit taxes” suppressing corporate earnings expectations—Congress imposed a maximum 95% tax rate on profits exceeding $5,000, severely constraining dividend discount model (DDM) components. It wasn’t until May 1942, after the Coral Sea and Midway battles turned the tide, that investors keenly perceived the war’s direction, and stocks bottomed out and rebounded early. During the latter half of the war, industrial indices rose 82%, transportation 127%, and utilities 203%.

The Korean War was the first U.S. war where the U.S. did not emerge victorious. Although military demand boosted the post-WWII sluggish economy, the U.S. military failed to achieve its objectives. Nonetheless, the Dow Jones Industrial Average still rose 26% throughout the period, and the transportation index surged 86%.

The Vietnam War became a watershed, the only war where the U.S. lost and gained no benefits.

U.S. defense budgets soared from $49.6 billion in 1961 to $81.9 billion in 1968 (accounting for 43.3% of the federal budget), with fiscal deficits rising from $3.7 billion to $25 billion, and inflation increasing from 1.5% to 4.7%. The U.S. GDP’s share of global output dropped from 34% to less than 30%. Post-war, U.S. war strategy shifted decisively: no more large-scale ground wars, replaced by short, low-casualty, airstrike-centered “proxy” conflicts.

Subsequent conflicts like the Gulf War, Kosovo, Afghanistan, and Iraq, were almost all initiated by the U.S. leveraging local conflicts or black swan events, mainly concentrated in the Middle East and the Balkans, with core objectives revolving around oil resource control and arms demand.

The transmission of war effects to the stock market has changed: from emotional to economic drivers.

Before World War II and earlier, war events often directly impacted investor sentiment. Victories at Manila Bay and Santiago Bay during the Spanish-American War, for example, pushed indices up about 10% within ten days; while news of U.S. entry into World Wars often triggered panic-driven declines.

Starting with the Korean War, this direct impact gradually diminished. From November 1950 to February 1951, as U.S.-South Korea forces retreated, the stock market continued rising—because the post-WWII stagnant economy reignited during the Korean War: U.S. real GDP grew about 8.7% in 1950, and maintained over 8% in 1951. The fiscal expansion driven by war became a catalyst for economic recovery.

This shift was even more evident during the Vietnam War. In November 1965, the Battle of Ia Drang (the first large-scale U.S.-Vietnamese engagement) did not cause a noticeable market shock; similarly, the Tet Offensive launched by North Vietnam in early 1968 did not prevent the stock market from reaching new highs. Instead, the real market drivers were macroeconomic policies responding to war expenditures, such as the Federal Reserve tightening credit in 1966, and two recessions in 1969-1970 and 1973-1975. War sentiment had given way to macroeconomic policy and corporate earnings.

The Gulf War provides the clearest example of “economic transmission.” After Iraq invaded Kuwait in August 1990, oil prices surged, and markets anticipated an economic recession, causing the S&P 500 to bottom out. After the multinational coalition bombed Baghdad in January 1991, oil prices fell back to pre-war levels, and stocks rebounded in tandem. During the war, the Dow and oil prices moved almost inversely—markets traded the trade-off between inflation and growth.

The 2001 Afghanistan war and the 2003 Iraq war further confirmed this pattern. The most symbolic moment was in May 2011, when Osama bin Laden was killed—an event expected to be a breakthrough in the Afghanistan conflict. The next day, the Dow barely declined 0.02%, and the S&P 500 fell 0.18%. The market almost completely ignored the news.

In summary, the U.S. stock market’s response to war has evolved along a clear path: from “emotion-driven” to “economically driven.” Early on, victory or defeat directly shook the market; after the Korean War, stocks increasingly focused on fiscal expansion, inflation expectations, oil prices, and monetary policy—real economic variables.

War itself is no longer the reason for market rises or falls; how war influences growth and costs is what truly matters for market valuation.

Which industries profit from war? The answer is changing.

During World War II, coal was the lifeblood of war, with bituminous coal increasing from 43.8% to 48.9% of the industry, and the sector gained 415% overall.

In the Korean War, oil took over as the new protagonist, with crude oil extraction and refining leading gains, continuing to rise from mid-1950 to the first half of 1952. During the Vietnam War, the collapse of the Bretton Woods system forced the dollar to depreciate, and OPEC was allowed to raise prices to compensate for losses. The oil extraction industry exploded during the dollar crisis from late 1970 to early 1973, with gains reaching 1378% over the entire war period.

The Kosovo War continued this pattern, with raw materials and energy sectors performing best.

The Gulf War is the only counterexample—its transmission shifted to an indirect “oil price → economic expectations” model, with consumer staples and healthcare industries performing well in the short term, while energy, raw materials, and industrials lagged behind.

A notable trend is that as the U.S. economy expanded, the military-industrial complex shifted from a growth engine to a fundamental part of the economy. The marginal contribution of individual wars to the total has decreased, and stock market drivers are increasingly driven by macro variables like inflation, interest rates, and fiscal deficits.