Geopolitical tensions, including Russia’s invasion of Ukraine and Indo-Pacific tensions, are fueling a new global defense supercycle. European defense budgets are set to grow 6.1% annually from 2023 to 2035, outpacing the US (1.7%), Russia (3.2%), and China (3.1%) as Europe addresses decades of underinvestment and seeks greater autonomy from the US.
Europe’s share of global defense spending is projected to increase from 16% to 21% by 2029, stabilizing through 2035. Meanwhile, the US, having steadily increased defense spending since 2017, is projected to increase its budget in line with GDP, reaching 3.3% by 2035, down slightly from 3.5% in 2024. In the midterm, both regions will prioritize munitions and off-the-shelf equipment to meet near-term needs
Long-Term Potential for Saab, Leonardo, and Rheinmetall
While this trend supports all European defense contractors, our top picks are Rheinmetall RHM, Saab SAAB B, and Leonardo LDO. Rheinmetall is a clear beneficiary, with Germany driving the spending increase and Rheinmetall’s strong positioning in munitions, land vehicles and air defense. Saab is well placed to capitalize on the growing strategic importance of Nordic and Baltic Sea defense and its exposure to German defense, taking on a more prominent role in the region.
Leonardo stands to benefit not only from increased European defense spending, particularly in electronics and its land vehicle joint venture with Rheinmetall, but also if Europe implements a budget allowance for defense. Italy and Spain, given their macroeconomic outlooks, would otherwise struggle to meet even the 2% GDP target by 2029.
As a result, we have increased Rheinmetall’s fair value estimate to EUR 1,310, Saab’s to SEK 371 and Leonardo’s to EUR 42.40.
Trump’s Call for European Defense Spending Target Unrealistic
Donald Trump’s call for Europe to raise defense spending to 5% of GDP is unrealistic, forcing major tax hikes or significant debt expansion. Europe’s defense industry cannot scale fast enough, requiring at least a decade to reach this level. However, 5% may not be necessary if Europe co-invests in joint military programs, reducing inefficiencies and lowering costs per platform.
We believe a 3.1% target by 2029 is feasible if structured strategically focusing on European production and research and development. Debt financing could sustain this growth and a temporary exemption of defense spending from the 3% GDP deficit limit would enable rapid expansion without breaching fiscal rules, spreading costs over time instead of requiring immediate tax hikes or budget cuts. Our Global Defense Industry Landscape highlights that higher defense spending can also drive economic growth, particularly when focused on domestic production and innovation rather than imports and off-the-shelf procurement.
Currently, over 60% of Europe’s defense imports come from the US, with much of the budget spent on off-the-shelf equipment. If Europe prioritizes local R&D and production, it could not only enhance strategic autonomy but also boost job creation and adjacent industries across the defense supply chain.
Compiled by Johanna Englundh.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
