Developing: Pakistan Declares 'Open War' on Afghanistan — What the Escalation Means for Defense Stocks, Oil Prices, and Emerging Market Risk

The latest crisis began with Pakistani airstrikes on Afghan border areas earlier this week, which Taliban officials said killed at least 18 people, including women and children. Pakistan maintained it was targeting militant hideouts and denied civilian casualties.

The Taliban launched what it called retaliatory operations at approximately 8:00 p.m. local time on Thursday, February 26, striking Pakistani military positions along the 2,600-kilometer Durand Line border. Taliban spokesman Zabihullah Mujahid described "extensive preemptive operations" against Pakistani army installations in multiple provinces, including Nangarhar, Nuristan, Kunar, Khost, Paktia, and Paktika.

Pakistan responded within hours with bombing raids on the Afghan capital Kabul and the provinces of Kandahar and Paktia. Journalists in Kabul reported hearing jets overhead and explosions in the early morning hours. A doctor in Kabul described to CBS News seeing "two missiles streaking across the beautiful Kabul sky" at approximately 2:13 a.m. The Taliban also claimed to have conducted unprecedented aerial attacks — reportedly using commercially available drones carrying improvised explosives — on targets inside Pakistan, including near a military academy in Abbottabad and an artillery school in Nowshehra. Pakistan said all Taliban drones were destroyed.

Pakistan's Prime Minister Shehbaz Sharif said his country's armed forces "have the full capability to crush any aggressive ambitions," while the Taliban's military chief, Qari Muhammad Fasihuddin, warned that Pakistan could expect "an even more decisive response" in future.

The South Asian escalation adds another catalyst to a defense sector that has already been one of 2026's strongest performers. Major U.S. defense contractors saw continued strength on Friday, with General Dynamics (GD) rising 2.2% to $350.72, Northrop Grumman (NOC) gaining 1.0% to $710.90, and RTX Corporation climbing 0.8% to $197.63. Lockheed Martin (LMT) traded at $641.63, near its 52-week high of $669.75.

The defense sector's momentum reflects a broader repricing of geopolitical risk. With NATO allies increasing spending commitments, the U.S.-Iran nuclear standoff at a critical juncture, Russia-Ukraine fighting continuing into its fourth year, and now the Pakistan-Afghanistan conflict escalating to declared warfare, investors have been steadily bidding up defense names. Boeing (BA), at $229.41, has nearly doubled from its 52-week low of $128.88 as it benefits from both commercial aviation recovery and defense contracts.

For investors, the key question is whether the Pakistan-Afghanistan conflict represents a sustained catalyst or a temporary spike. Analysts at the Atlantic Council note that this conflict is qualitatively different from prior border skirmishes — Pakistan is now targeting Taliban government facilities rather than just militant hideouts, signaling a strategic shift that could sustain elevated defense spending across the region.

WTI crude oil has traded between $62.53 and $66.69 per barrel over the past week, with the most recent settlement at $66.36 on February 23. While Pakistan and Afghanistan are not major oil producers, the conflict's location raises concerns about broader regional stability affecting energy supply chains.

Pakistan sits along critical shipping and pipeline corridors connecting Central Asian energy resources to global markets. The China-Pakistan Economic Corridor (CPEC), a $62 billion infrastructure project that includes energy pipelines and port facilities at Gwadar on the Arabian Sea, could face disruption if the conflict spreads. Any sustained instability along these routes would add friction to energy supply chains that are already navigating sanctions-related constraints on Russian and Iranian oil.

The more immediate concern for oil markets is the potential for the conflict to draw in regional powers. Iran, which shares borders with both Pakistan and Afghanistan, has already offered to mediate. Iranian Foreign Minister Abbas Araqchi urged restraint during Ramadan, calling it "the month of self-restraint and strengthening of solidarity in the Islamic world." China, which counts both countries as partners and has significant infrastructure investments in the region, called for a ceasefire. Any widening of the conflict involving Iran — which is simultaneously engaged in nuclear negotiations with the United States — could create compounding geopolitical risk premiums across energy markets.

The Pakistan-Afghanistan conflict carries implications for emerging market investors beyond the bilateral dimension. Pakistan's economy, already fragile from a 2023 IMF bailout and persistent inflation, faces additional pressure from military spending escalation and the closure of border crossings that facilitate trade.

Abdul Basit, a senior associate fellow at the International Centre for Political Violence and Terrorism Research at Nanyang Technological University, described the escalation as taking the conflict into "uncharted territory." He warned that the Taliban, lacking conventional military capabilities such as an air force or missiles, may resort to proxy attacks — including suicide bombings in Pakistani cities — as summer approaches.

The terrorism dimension is what elevates this conflict above a bilateral border dispute. Both ISIS-K (the Islamic State's regional affiliate, which claimed a deadly mosque bombing in Islamabad and a restaurant attack in Kabul in recent months) and Al Qaeda maintain presence in the region. NBC News reported that experts warn the Pakistan-Afghanistan conflict strengthens these groups by creating ungoverned spaces and drawing security resources away from counterterrorism operations. "If they get strengthened, that undermines U.S. homeland security as well," Basit told NBC News.

The U.S. diplomatic mission to Afghanistan said it is "closely monitoring the situation," while former U.S. Ambassador to Afghanistan Zalmay Khalilzad called it "a terrible dynamic that must stop." UN Secretary-General Antonio Guterres urged both sides to protect civilians and resolve differences through diplomacy.

For portfolio positioning, the Pakistan-Afghanistan escalation reinforces several themes that have been building throughout early 2026. The U.S. dollar index, at 117.99, reflects a steady strengthening as investors seek safe-haven assets — a trend that could accelerate if South Asian instability compounds existing geopolitical flashpoints.

Defense stocks remain the most direct beneficiaries. The sector has shown remarkable resilience with Northrop Grumman's 50-day moving average at $649.75 versus its current price of $710.90, and General Dynamics' 200-day moving average at $324.89 versus $350.72 — both indicating sustained momentum rather than a one-time spike. With earnings announcements for all four major defense primes scheduled for late April, any evidence of accelerating international orders could provide the next catalyst.

Oil's response has been relatively muted, suggesting markets are not yet pricing in a regional conflagration. However, the confluence of Pakistan-Afghanistan hostilities, the U.S.-Iran nuclear deadline, and elevated NATO-Russia tensions creates a risk environment where a single escalatory event in any theater could trigger correlated moves across defense, energy, and safe-haven assets. Investors with emerging market exposure should monitor Pakistan's sovereign credit spreads and currency for early warning signs of broader financial stress.