Europe’s Defense Spending Pledge Lifts Stocks to Fresh Records

(Bloomberg) — European stock benchmarks hit fresh record highs after a pledge by regional leaders to boost military spending, with defense stocks adding $35 billion in market capitalization.

France’s CAC 40 Index closed just below its May record high, while Germany’s DAX Index gained 2.6% in its biggest one-day advance since 2022. The pan-European Stoxx Europe 600 Index rose 1.1% by the close, as many defense stocks posted double-digit gains. 

Rheinmetall AG surged 14%, while Saab AB rallied 12%. BAE Systems Plc added 15%. A Goldman Sachs Group Inc. basket of European defense stocks jumped 15% to a record, bringing total gains this year to over 60%.

“This is the trade of the quarter for sure,” said Mabrouk Chetouane, head of global market strategy at Natixis Global Asset Management. There’s going to be further momentum in sectors like tech and defense as the rally in European equities starts to become more concentrated, he said.

The UK and France have been seeking to build what Prime Minister Keir Starmer called a “coalition of the willing” to participate in peacekeeping forces and help reassure Kyiv about the durability of any peace. French President Emmanuel Macron told Le Figaro newspaper after a gathering of political leaders in London over the weekend that the EU should provide €200 billion ($210 billion) to boost its defense capabilities. 

The prospect of a surge in defense spending by European countries has already led to a sharp rally in the shares of companies involved in the sector. Rheinmetall, one of Europe’s biggest suppliers of material for land forces, has gained over 90% so far this year and is up over eleven-fold since the Russian invasion of Ukraine started three years ago.

Vincent Juvyns, global market strategist at JPMorgan Asset Management, said public defense spending will rise sharply in coming years, even if peace in Ukraine remains a possibility for 2025, recent diplomatic clashes between allies notwithstanding.

“One senses a large consensus for Europe to take its future in its own hands, and that more military spending is coming,” he said.

Europe’s 2025 rally has boosted Stoxx 600’s market value by about more than $100 billion so far this year, decisively outperforming the US stock market. 

Easing euro-area inflation data published in morning trading boosted confidence on the disinflation trend in Europe and on upcoming interest-rate cuts from European Central Bank. 

The Stoxx 600 has outperformed the S&P 500 by over 11 percentage points since the end of November, with the prospect of peace in Ukraine being one of the drivers of the rally. US indexes edged lower again on Monday.

“There is currently no reason for the momentum in Europe to stop. When you look at the defiance some investors have toward US markets where growth is slowing down and the remaining doubts on China, Europe is a good place to rotate and redeploy capital,” said Enguerrand Artaz, a macro strategist and fund manager at La Financière de l’Echiquier in Paris. 

Investors have reduced holdings in expensive US stocks since the presidential election, while increasing allocation toward Europe. The heavy rotation extended in February as weaker-than-expected economic triggered growth worries, while the case for artificial intelligence spending started to show some cracks. 

European defense stocks are one of the main beneficiaries of this rotation, with military spending from the European bloc expected to increase drastically over the next few years.

For BAE Systems, Europe’s largest weapons maker, defense spending has continued to strengthen over the past year, Chief Executive Officer Charles Woodburn said on a conference call last month.

The British aerospace and defense contractor said the UK’s plan to increase its military budgets will support its major submarine and frigate programs, and that it’s well positioned to benefit from weapons sales to NATO members.

“Our growth opportunities are significant and we remain focused on consistently executing our long term strategy to deliver top line growth, margin expansion and solid cash generation,” Woodburn said.

One question on investors’ minds is if the region’s defense companies have sufficient capacity available to ramp up output. Even in the event of a peace agreement, there’s a lack of industrial bandwidth available, meaning order books will remain full for years to come. 

“The German industry can redeploy itself into the sector,” Artaz argued. 

On the equity research side, JPMorgan Chase & Co. analysts led by David Perry raised their price targets by an average of 25%, saying the Europe’s rearmament cycle was now “for real” and the US’s increasing reluctance to subsidize the region’s defense would lead to more at-home production and fewer imports.

“The events of the last two weeks have turbo-charged this thesis,” Perry wrote. “We believe that we will now enter a phase where valuation multiples increase, with earnings upgrades following in time.”

To be sure, other investors caution that the geopolitical instability might weigh on the economy and act as a drag on growth.  

“Every day bring its lot of contradictory news and this uncertainty is starting to take its toll on the real economy, on investment decisions and consumption,” Raphael Thuin, head of capital markets strategies at Tikehau Capital in Paris, said referring to the European leaders’ summit in London.

“This is not a sustainable new driver for market: earnings, growth, tariffs, interest rates are what investors remain primarily focused on.”

Here’s what market participants are saying:

Emmanuel Cau, head of European equity strategy at Barclays 

“More than ever, the direction of travel for Europe seems towards more policy loosening, both fiscal and momentary, likely to be growth positive. And more defence spending seems the only way to go, likely to keep supporting defence stocks. Progress towards a ceasefire in Ukraine still looks possible post the week end events, but shape and timing look very uncertain. 

Overall, it may well turn out to be a positive for Europe to stand on its own two feet, but this will take time. In the meantime geopolitical risk has certainly gone up, fiscal capacity is constrained and tariffs threat looms. So the jury is still out on whether this watershed moment in global politics will result in a more integrated, more independent and ultimately stronger Europe down the road, or result in more fragmentation. A make or break moment for Europe.”

Kevin Thozet, member of the investment committee at Carmignac in Paris

“The main ‘positive’ or rather silver lining in such a context is that European institutions have proved that they can be creative at times of existential crisis. If the so-called old continent does finally manage to speak as one, this would prove to be positive for European assets eventually. If not in absolute, in relative terms.”

Daniel Varela, CIO at Piguet Galland

“Despite the intense political news of the past three days, the likelihood of a ceasefire in the coming months remains high, which points to a short-term reduction in political risk and, consequently, a favorable reaction from the stock markets, particularly in Europe.

The impact on the European economy should be positive over the years and obviously defense stocks are expected to continue outperforming.

The prospect of a ceasefire or peace in Ukraine should indeed result in a continued recovery of European stock markets in 2025.”

Eli Mizrahi, managing partner of Targa 5 Advisors in Geneva:

“The UK and France’s decision to provide security guarantees to Ukraine and work on a peace plan is a significant step toward strengthening European security. It demonstrates Europe’s commitment to stability and its willingness to take greater responsibility in the region’s future. This effort also comes at a sensitive time, as tensions have emerged between Ukrainian President Volodymyr Zelenskiy and Donald Trump over Trump’s position on military aid. Beyond its geopolitical impact, this initiative provides reassurance to markets by reducing uncertainty and reinforcing investor confidence. A strong and lasting security framework for Ukraine can help support economic resilience and long-term stability in Europe.”

Andrea Tueni, head of sales trading at Saxo Banque France

 “I think the markets are mainly taking focus on the fact that we are moving towards a ceasefire, we just don’t know what form it will take yet. If Europe finds itself alone in having to help Ukraine, it is clearly a challenge that can continue to benefit the value ​​of the defense sector.”

Gerry Fowler, strategist at UBS AG 

“European leaders have been increasingly recognising the increased urgency of self-reliance. Given the starting point is one of significant reliance in key areas like technology and defense, European political cohesion may be seen as a positive by longer term investors as it raises the likelihood that the reforms proposed by Draghi are implemented.

European countries have already committed to very large defense spending increases and this may accelerate further. The stocks have moved a long way to reflect this accelerated growth but while upward revisions continue, investors won’t worry too much about valuations.”

–With assistance from Isolde MacDonogh, Joe Easton, Allegra Catelli and Sagarika Jaisinghani.

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