Europe’s military stocks saw their highest day in years on Monday as a result of the stunning images in which President Donald Trump and Vice President J.D. Vance disparaged Ukrainian President Volodymyr Zelensky and the response from European capitals.
The largest defense company in the United Kingdom, BAE Systems (UK:BA), French fighter jet manufacturer Dassault Aviation (FR:AM), German radar systems manufacturer Hensoldt (XE:HAG), partially Italian government-owned arms manufacturer Leonardo (IT:LDO), and Germany’s largest arms manufacturer, Rheinmetall (XE:RHM), all saw double-digit percentage gains.
XX:SXPARO, the Stoxx aerospace and defense index, increased by 6%.
This year, an ETF that tracks European aerospace and defense firms and is traded in the United States, EUAD, has already increased by 28%.
The euro (EURUSD) and the yield on the 10-year German bund BX:TMBMKDE-10Y both increased in response to the anticipated increase in spending.
The most significant news came from Germany, where Bild and other media outlets reported that the country’s centrist parties are trying to establish two major fiscal pools with at least EUR200 billion ($208 billion) set aside for a special defense fund, outside of the constitutional debt brake. According to research cited in the papers, Germany may require both EUR500 billion in public investment and EUR400 billion in defense spending.
Discussions about the centrist parties leveraging their little time before a new parliament to increase spending had already begun, but the explosion in the Oval Office seemed to hasten the process.
Meanwhile, European nations pledged to boost defense expenditure during a special summit in London on Sunday that included French President Emmanuel Macron and U.K. Prime Minister Keir Starmer.
“We think Germany was shocked by that event, which amplified fear that the U.S. is abandoning its role as Europe’s benign protector, and we see this as lending support to the fiscal negotiations,” according to Evercore ISI analysts.
“The higher end of the money discussed for the German funds would be as much as has been invested in East Germany since reunification and worth up to 2% of GDP,” said Robin Winkler, chief German economist at Deutsche Bank.
According to JPMorgan analysts, the four largest European defense companies—Bae, Thales (FR:HO), Leonardo, and Rheinmetall—may trade at 20 times profits by the end of 2026, up from 16 times.
The JPMorgan analysts increased their price forecasts by an average of 25% while making impromptu assumptions. They note that now, over 40% of European defense spending goes toward the development, acquisition, and maintenance of equipment, and they anticipate that European members of the North Atlantic Treaty Organization will increase their spending to at least 2.5 percent of GDP.
“As budgets rise, the share allocated to equipment tends to rise,” they claim.
Additionally, they anticipate that European NATO countries will increase their about 40% contribution of development, procurement, and maintenance.
Given the time required to raise budgets and then negotiate contracts, they did issue a warning that the European military businesses might not raise their sales and profitability guidance this year.
