The Congressional Budget Office (CBO) has released a detailed assessment of the financial toll of U.S. combat operations against Iran, estimating that the Department of Defense has incurred approximately $38 billion in costs through August 1. The figure, which covers expenditures on munitions, equipment, operations, and fuel, underscores the significant fiscal impact of the conflict. Looking ahead, the CBO projects that if fighting continues at the relatively subdued pace observed in May and June, the monthly cost could stabilize around $2 billion. However, a return to the intensity levels seen in July would push that figure to $3 billion per month, with the potential for even higher costs should the conflict escalate further.
For investors, the military tally is only part of the story. In its September 15 assessment, the CBO also revised its inflation forecasts upward, citing the conflict's disruption of energy markets. The agency now expects first-quarter 2027 headline PCE inflation to be 0.5 percentage points higher than its February projection, with core PCE inflation rising by 0.3 points. Additionally, the CBO estimates that the conflict has added nearly 0.2 percentage points to three-month Treasury bill rates in 2026. This dual impact—through federal spending and the cost of money—means the war is now a significant factor in both fiscal and monetary policy outlooks.
The market reaction to the CBO report was relatively muted, suggesting that investors had already priced in much of the defense spending narrative. Lockheed Martin (LMT) shares rose about 0.7% to $533.26, while RTX (RTX) gained 0.2% to $195.74 in afternoon trading. The 10-year Treasury yield stood at 5.00%. These modest moves indicate that the report is seen as confirmation of an ongoing replenishment cycle rather than a catalyst for a sudden revaluation of defense contractors.
What the Billion Includes
The CBO's estimate covers a range of costs, including replacement of expended munitions and equipment lost in battle, additional flying hours, operations, and higher fuel costs. Notably, it excludes expenses borne by other federal agencies, routine military expenditures already in the baseline budget, and longer-term obligations such as veterans' health care and disability compensation. The agency acknowledges that the estimate is rough, as the Department of Defense did not respond to its requests for information, forcing analysts to rely on government databases and public reports. The CBO also cautions against summing its various categories, as they use different accounting periods and methodologies.
A useful cross-check came a day earlier from the Defense Department inspector general's Operation Epic Fury report, which placed the cost at $33.4 billion as of June 29. That figure includes $7.4 billion in incremental obligations, $22.3 billion in replacement-cost munitions, and $3.7 billion in equipment losses, excluding infrastructure repairs. The discrepancy of $4.6 billion between the two estimates is largely due to the extra month covered by the CBO and methodological differences, rather than representing a clean monthly spending figure.
The CBO also compared its estimate with the administration's June request for $87.6 billion in supplemental appropriations. Of that request, the CBO judged $42.3 billion to be directly related to the conflict—about 10% above its own estimate of costs through August 1. It's important to note that appropriations represent authority to spend, not actual cash outlays, so the timing of spending may differ.
Market Implications: Treasury Borrowing and Inflation
The Treasury had expected to borrow $739 billion in privately held net marketable debt during the July-to-September quarter before the CBO release. The $38 billion war estimate is roughly 5.1% of that quarterly borrowing projection, illustrating the scale of the fiscal impact. However, this does not necessarily mean the Treasury will need to add $38 billion to this quarter's auctions; the timing of spending, existing appropriations, tax receipts, and cash balances all influence when a federal cost translates into borrowing.
For bondholders, the inflation channel may be more critical. The CBO attributes the inflation uptick to reduced oil and gas shipments through the Strait of Hormuz and disrupted Red Sea shipping. Higher energy prices added an estimated 2.3 percentage points to the annualized PCE inflation rate in the second quarter. If the conflict persists, short-term rates could remain elevated even if Congress funds the military without an immediate change in auction sizes.
Defense Sector: Backlogs and Execution
For defense shareholders, the inspector general's munitions figure points to replenishment demand, but it doesn't specify which contractors will benefit or when revenue will be recognized. Lockheed Martin's second-quarter results already showed a record $230 billion backlog, including $87.9 billion at its Missiles and Fire Control segment. That segment's quarterly sales rose 19% to $4.1 billion, driven by production ramps for PAC-3, THAAD, and strike missiles. RTX reported a $289 billion company backlog, of which $119 billion was defense. Raytheon's quarterly sales increased 18% to $8.27 billion, with an operating margin of 12.6%.
These figures suggest that capacity and execution are the key tests for defense companies. A missile used today can take years of contracting, supplier expansion, and production before it becomes contractor revenue. The strongest counterargument to a fresh defense-stock bet is that much of the replenishment thesis is already reflected in record backlogs and raised 2026 guidance. The next evidence that matters is more specific: enacted funding tied to particular programs, higher production rates without margin erosion, and whether the conflict remains near the CBO's $2 billion monthly case or escalates to the $3 billion-plus path.
