By Arsheeya Bajwa

(Reuters) -Palantir Technologies ( PLTR ) has succeeded where most tech stocks have struggled this year: staying hot in a cooling market.

The company's military-grade AI tools along with its deep defense ties and high-level government connections at a time when the U.S. is boosting spending on defense software have helped investors raise the bets on the stock.

It has surged more than 70% this year and is the S&P 500's second-best performer - a standout in an otherwise sluggish tech market roiled by investor worries over U.S. tariffs and economic uncertainty.

Palantir ( PLTR ) co-founder Peter Thiel was an early backer of President Donald Trump and has close ties with key Washington lawmakers, including Vice President JD Vance, whom he supported in a 2022 U.S. Senate race.

"The relationships that Palantir's ( PLTR ) founders...have with senior members of the Trump administration are helpful for business," D.A. Davidson analyst Gil Luria said.

Palantir ( PLTR ) in April won a $30 million contract from the U.S. Immigration and Customs Enforcement to develop an operating system that identifies undocumented immigrants and tracks self-deportations, its largest single award from the agency among 46 federal contract actions since 2011.

"They probably benefit a little bit more with Trump because of the impetus on security, border and immigration," said Francisco Bido, senior portfolio manager at Palantir ( PLTR ) investor F/m Investments. "They're going to get a lot of work out of that."

Palantir ( PLTR ), however, downplayed the impact of political goodwill.

"The politics around it change, so it gets increased visibility but we've been working with ICE since 2010," the company's communications head, Lisa Gordon, told Reuters.

Founded in 2003 and listed in 2020, Palantir ( PLTR ), which was initially backed by the CIA, has drawn investor interest in its growing AI platform that allows companies to simulate AI-related scenarios, debug code and test large language models.

"No other large software company can currently combine that level of growth with high profitability and unique offering," Luria said.

But its growth has largely been driven by U.S. government contracts which made up for more than 42% of its revenue in the March quarter.

Sales to U.S. businesses accounted for 29%, while commercial sales outside the U.S. were down 5% from a year ago - a slide that some analysts point to Palantir's ( PLTR ) polarizing political profile and America-first stance.

The rally in its stock builds on a 12-fold surge over the past two years that outpaced gains in red-hot companies such as Nvidia ( NVDA ) and brings with it a valuation premium.

Palantir ( PLTR ) trades at a forward price-to-earnings ratio of 200.47, compared with Nvidia's ( NVDA ) 27.96.

(Reporting by Arsheeya Bajwa in Bengaluru; Editing by Aditya Soni and Arun Koyyur)