With the United States accusing Pakistan of playing a “double game” with respect to fighting terrorism, the U.S. Aerospace & Defense space has seen a thrilling start to 2018. Per Reuters, U.S. Ambassador Nikki Haley’s statement to withhold aid worth $255 million to Pakistan clearly shows that the White House might be looking to build pressure on the country.

Defense stocks moved north following escalating tensions between the nations, with the Dow Jones U.S. Aerospace index rising 0.6% on Jan 2. Major defense companies like The Boeing Co. (BA – Free Report), L3 Technologies, Inc. (LLL – Free Report) and Curtiss-Wright Corporation have gained 0.7%, 0.2%, and 0.7%, respectively.

Defense Eclipses Tech As Well

Before picking defense stocks which are likely to excel in 2018, let’s take a quick look at how these stocks have performed in 2017. Impressively, stocks in the Zacks Aerospace sector have rallied 38.2% in 2017, significantly outperforming the S&P 500 index’s 19.8% gain.

A comparison with the Tech sector, which has fared well all through 2017, also places Aerospace & Defense stocks at an elevated spot. Notably, the Zacks Computer and Technology sector has returned 27.2% in 2017, lagging the Aerospace Sector.

Considering the solid rally of 2017, let’s discuss factors that will warrant an outperformance by aerospace and defense stocks in 2018 as well.

Will the Rally Continue?

There’s no denying the fact that Trump’s presidency has been a boon for the U.S. defense space, which was grappling with the budget sequestration act implemented by the prior government. While the fiscal 2018 (FY18) defense budget reflecting a noble 10% hike from the FY16 level was a major forerunner for this sector’s growth at the beginning of 2017, the FY18 defense policy bill worth $700 billion that extensively surpassed Trump’s budget request took stocks to new heights in the second half of the year.