The European defense sector is demonstrating remarkable resilience, maintaining a robust upward trajectory despite immediate geopolitical developments, including potential high-level talks concerning the conflict in Ukraine. This performance underscores a fundamental shift in strategic thinking across Europe, driven by a long-term commitment to bolster military capabilities. The Stoxx Europe Aerospace and Defense index, for instance, has surged by 52% in 2025, propelled by significant increases in government and NATO military expenditures. Analysts widely concur that the sector’s momentum transcends short-term peace prospects, noting a strategic imperative for Europe to be “building for war” through comprehensive modernization and restocking of arsenals. This reorientation is further evidenced by a new long-term NATO spending target of 5% of GDP.
- The European defense sector exhibits robust growth, unaffected by immediate geopolitical shifts.
- There is a fundamental, long-term commitment across Europe to bolster military capabilities.
- Significant increases in government and NATO military expenditures are propelling the sector’s performance.
- Analysts view the current momentum as a strategic imperative for “building for war,” surpassing short-term peace prospects.
- A comprehensive modernization and restocking of arsenals is underway, extending beyond merely replenishing supplies for Ukraine.
- A new NATO spending target of 5% of GDP signifies a profound reorientation in defense strategy.
A Resilient “Win-Win” Sector Outlook
The defense industry is frequently characterized as a “win-win” proposition, demonstrating resilience under various geopolitical outcomes. Dmitrii Ponomarev, whose defense fund manages $6.9 billion with holdings in companies like Leonardo (LDO), Thales (HO), and Saab (SAAB-B.ST), suggests that while a peace agreement might impact manufacturers heavily reliant on Ukrainian shipments, large, diversified contractors with long-cycle programs and services are better positioned to absorb volatility. Christopher Granville of TS Lombard echoes this sentiment, arguing that sustained demand is inevitable: if negotiations fail, inventory replenishment will surge; if peace ensues, a militarily formidable Russia will necessitate continued investment. In either scenario, the demand for defense capabilities remains strong, with Granville suggesting the market may underappreciate the latter as a catalyst for sustained investment.
Prolonged Rearmament and Structural Drivers
Industry executives foresee a European rearmament phase lasting at least a decade, influenced by macroeconomic and historical factors that extend beyond the immediate conflict in Ukraine. Dimitrios Kottas of Delian Alliance Industries emphasizes that the decision to modernize defense capabilities is inherently linked to deeper structural trends. Similarly, Micael Johansson, CEO of Saab (SAAB-B.ST), noted that even with a ceasefire or a reasonable agreement, governments are unlikely to scale back investment, citing the persistent threat of an “aggressive neighbor” to the East.
While the sector’s performance has been overwhelmingly positive, it has not been without minor fluctuations. Rheinmetall, for example, experienced an 8% dip after quarterly results missed expectations due to delays in contract awards stemming from Germany’s government transition. However, the company has maintained its annual guidance, anticipating a surge in orders during the latter half of the year. Similarly, in June, Citi downgraded recommendations for Hensoldt (HAG), Renk (RENK), and Saab (SAAB-B.ST), cautioning that their valuations might incorporate excessive growth expectations despite their value having doubled this year. Nevertheless, optimism generally prevails. Neil Birrell of Premier Miton acknowledges potential short-term overvaluation but underscores that defense spending and regional self-sufficiency in critical resources like energy, food, and raw materials represent multi-decade trends poised to significantly benefit the sector.
Michael Zhang is a seasoned finance journalist with a background in macroeconomic analysis and stock market reporting. He breaks down economic data into easy-to-understand insights that help you navigate today’s financial landscape.