The European defense industry is experiencing a remarkable surge in value, propelled by a renewed regional commitment to bolstering military expenditures. This significant shift has ignited a bull run within the sector, with many companies seeing their valuations climb dramatically as nations across the continent reassess their security priorities in a changing geopolitical landscape.
Market Performance and Momentum
The momentum in European defense stocks remains robust. The Stoxx Europe Aerospace and Defense index has seen a notable increase, rising approximately 45% over the past year. Several key players within the industry have achieved even more impressive gains; some companies have more than doubled their share value in just six months. This upward trend reflects a strong underlying demand driven by multi-year procurement cycles, expanding NATO budgets, and intensified national rearmament initiatives.
However, the sector’s rapid ascent is not without its challenges. A primary concern is the escalating shortage of rare earth minerals, which are crucial components for advanced defense technologies. This supply bottleneck presents a potential hurdle to continued growth, leading to divided opinions among industry experts regarding the sector’s future trajectory.
Navigating Supply Chain Vulnerabilities
Rare earth elements and other critical raw materials represent a growing strategic vulnerability for defense manufacturers. For instance, in 2023, Europe sourced nearly 90% of its yttrium – a rare earth element essential for fighter jets, land vehicles, and targeting systems – from China. This heavy reliance underscores the potential for disruptions.
While concerns exist, analysts like Loredana Muharremi, an equity analyst at Morningstar, suggest that these supply chain risks, though material, are unlikely to trigger a major correction in European defense stocks independently. She emphasizes that the sector’s revaluation is fundamentally rooted in strong structural demand. Nevertheless, she acknowledges that prolonged import restrictions could eventually impact production schedules. The prospect of diplomatic engagement between China and the European Union, however, offers a mitigating factor, potentially reducing the likelihood of severe supply shocks.
Recent high-stakes trade discussions between the U.S. and China in London highlighted the critical nature of Chinese export controls over rare earth minerals. Following these negotiations, representatives from Washington and Beijing announced an agreement, which included discussions on rare earth restrictions, now awaiting approval from their respective presidents.
Patrice Caine, CEO of Thales, a French defense giant whose shares have climbed approximately 80% this year, noted that while the supply situation is gradually improving, tensions could persist in areas like mechanical parts and electronic boards. Despite this, he downplayed the immediate direct impact of the bottleneck on Thales’ extensive operations, indicating that the most critical shortages are further down their complex supply chain.
Divergent Analyst Outlooks
The question of whether the European defense sector has peaked elicits varied responses from financial strategists:
- Cautious View: Maximilian Uleer, Head of European Equity and Cross Asset Strategy at Deutsche Bank, adopts a cautious stance. He suggests that current stock prices largely reflect anticipated higher spending plans, noting that the average price-to-earnings ratio in the sector has risen significantly. Uleer points to the upcoming NATO summit, where an expectation exists for members to commit to spending 5% of their GDP on defense—a concept championed by U.S. President Donald Trump. While this could provide short-term inflows, he finds it challenging to identify what new drivers could propel the sector beyond current expectations, foreseeing limited upside in the latter half of the year.
- Long-Term Optimism: In contrast, Aymeric Gastaldi, International Equities Portfolio Manager at Edmond de Rothschild Asset Management, holds a fundamentally optimistic long-term view. He argues that the combination of growth potential and visibility warrants a structurally higher valuation multiple for the entire sector. Edmond de Rothschild Asset Management projects European defense sales to grow by over 150% in the next seven years. Gastaldi attributes this to increased defense spending from under 2% of GDP to over 3%, a rise in equipment spending within the overall mix, and a greater emphasis by European nations on local sourcing. He highlights Germany’s contemplation of boosting its military spending towards 5% of GDP by 2032 as a “sea change” for the industry.
- Sustained Growth Potential: Mark Boggett, CEO of Seraphim Space, echoed this sentiment, stating that he does not believe regional defense stocks have reached their peak. He emphasizes a fundamental transformation in global defense priorities, with governments worldwide accelerating investments in sovereign space capabilities due to their critical strategic importance for national security. This perspective is reinforced by substantial defense budgets, such as U.S. President Donald Trump’s recently announced $1 trillion defense budget, which includes a “Golden Dome” missile defense system, and the European Union’s plans to allocate up to 800 billion euros ($917.5 billion) for defense spending.
Key Beneficiaries and Future Prospects
Several European defense companies have indeed seen significant rallies this year. German players have been particular beneficiaries, following the country’s historic debt reform in March, which enabled increased spending on national security.
| Company | Year-to-Date Rally |
|---|---|
| Renk (Tank parts maker) | Approximately 270% |
| Rheinmetall (Arms manufacturer) | 172% |
| Hensoldt (Defense tech giant) | 163% |
While some short-term tactical sell-offs might occur as investors evaluate the sector’s peak, the long-term outlook remains strong for companies capable of demonstrating robust earnings growth within a low economic growth environment. The structural shifts in global security priorities and the commitment to increased defense spending across Europe signal a period of sustained expansion for the sector.
Lucas turns raw market data into actionable strategies, spotting trends in a heartbeat. With 9 years managing portfolios, he treats market volatility like a surfer riding big waves—balance and timing are everything. On weekends, Lucas hosts “Bull & Bear Banter” podcasts, showing that finance discussions can be as entertaining as they are informative.