Defense Rally

Defense Stocks Reach New Heights

European defense shares hit fresh all‑time highs yet again this week, as US President Donald Trump called for the 2027 military budget to be raised to $1.5 trillion from the Congress-approved $901 billion this year.

Defense stocks in the US and Asia were also on the rise.

The sector has rallied since Russia’s 2022 invasion of Ukraine. A steady stream of geopolitical flashpoints has fueled the demand for military equipment, with software firms like Palantir, also reaping benefits.

Defense Becomes a Leading Theme in Europe

The STOXX Europe Aerospace & Defense index surged 57% in 2025, making it one of the best‑performing assets in the global markets — even after a sharp pullback in October.

The index includes many European military equipment heavyweights like BAE Systems, Airbus, Leonardo, Thales, Rheinmetall, and Saab, all of which have seen strong order books and rising demand.

Momentum has carried into 2026 as well, with the sector already up 9% as of Thursday, underscoring how firmly defense has become a winning theme in the markets.

Why Defense is Outperforming

Europe’s rearmament cycle has moved far beyond emergency budgets, as Washington has signaled reluctance to pick up the bill for other countries. Governments are rebuilding stockpiles and modernizing equipment.

Before Russia attacked Ukraine, it was common for countries to run defense budgets under the NATO target of 2% of GDP. Now, countries are racing to get to the target and beyond.

• France intends to double its defense budget by 2027 compared to a decade before to just over 2% of GDP.
• Germany aims for 3.5% defense spending of GDP by 2029, although the government has cautioned it's likely to undershoot that target.
• The UK looks to raise the core military spending to 3.5%, with an additional 1.5% on national security by 2035.

Geopolitics Steering the Market

Defense stocks continue to draw attention as investors are faced with a daily torrent of news on rising geopolitical tensions around the globe.

Key triggers include:

• Venezuela: The US capture of President Nicolás Maduro, tanker seizures, air strikes, and rising threats toward nearby countries, including Mexico, Cuba, and Colombia.
• Arctic tensions: Renewed US interest in Greenland, with a military intervention not ruled out.
• Middle East: Peace plan in Gaza stalling, with frequent violations of the ceasefire; large‑scale protests in Iran have the potential to escalate into an armed conflict.
• Ukraine: Russian invasion continues, with Western countries providing support to Ukrainians.
• Asia: Heightened tensions relating to Taiwan.

Risks and Realities of Defense Stocks

Defense stocks behave differently from most sectors because they depend heavily on politics, public spending, and global tensions. 

• Budgets shift: Elections or policy changes can quickly raise or cut military spending.
• Geopolitics cuts both ways: Tensions can boost demand, but de‑escalation can cool the sector fast.
• Ethical questions: Some investors avoid the industry; others focus on national security or the tech side.
• More than weapons: Growth areas include cybersecurity, satellites, drones, and software.
• Strict rules: Export controls and international regulations can limit where companies can sell.

Defense sits at the crossroads of money, politics and ethics, which is why it requires more thought than most sectors.