Defense Stocks Soar Amid Looming Transatlantic Split

European aerospace and defense stocks jumped by double-digit percentages as events in Washington DC signal deteriorating Western alliances.

Lukas Strobl 3 March, 2025 | 10:20AM
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Illustration of the map of Europe with blue water and green land.

European defense stocks surged Monday in the wake of a widening rift between Europe and the United states following US President Donald Trump’s acrimonious press conference with Ukraine’s Volodymyr Zelensky on Friday.

The press conference prompted a weekend scramble among European officials to offer Ukraine separate security assurances and fueled a growing push for European governments to significantly increase defense spending.

Among the largest defense companies, Germany’s Rheinmetall RHM rose 14% and Italy’s Leonardo LDO closed 16% higher, while BAE Systems BA. was up 15% at the end of trading. France’s Thales HO rose 16% and aircraft makers Dassault Aviation AM and Saab SAAB rose 15% and 12%, respectively.

Among smaller companies in the sector, defense electronics group Hensoldt HAG rose 22%, while Kongsberg KOG rose 20%. Britain’s Chemring CHG and QinetiQ QQ. each rose about 12%.

“European defense stocks continue to rally on the back of the latest developments including talks about a potential US pullback and increasing pressure from the US for Europe to boost defense budgets,” Morningstar aerospace and defense analyst Loredana Muharremi said on Monday.

European Defense Stocks Continue to Outperform US Peers

At the same time, US defense stocks remained broadly in line with Friday’s closing prices. “Investors expect US support pullback and Europe to ramp up its defense spending prioritizing European companies,” Muharremi noted.

The region’s aerospace and defense sector has sharply outperformed the rest of European equity markets since the beginning of the year, propelled by an emerging consensus that NATO’s decade-old defense spending target of 2% of GDP was inadequate and needed to be raised.

“We expect European defense spending to reach 3.1% of gross domestic product by 2029, and 3.5% by 2032. We believe a 3.1% defense spending target by 2029 is feasible if this is strategically structured, with debt financing potentially supporting the growth, and focuses on European production and research and development,” Morningstar’s Muharremi said.

European Defense Spending to Ramp Up

The sector’s rally had accelerated in February, as US President Donald Trump levelled a series of surprising allegations against Ukraine, which cast doubt on the US’s continued willingness to push Russia towards peace, and its preparedness to help defend Europe in case of further escalation.

In a note published Monday morning, analysts at JPMorgan raised their 12-month price targets for European defense stocks by an average of 25%.

“We expect significant increases in consensus estimates / company guidance in the coming months and years. We also expect the European Defence Sector to further re-rate as investors underwrite strong growth and visibility,” analysts David H Perry and Lucy Fitzgerald wrote.

Morningstar’s Top Picks in European Aerospace and Defense

While all European defense contractors benefit from this trend, Morningstar analysts’ top picks include Rheinmetall, SAAB, and Leonardo.

Rheinmetall is a key beneficiary due to Germany’s defense spending surge, with strong positions in munitions, land vehicles, and air defense.

SAAB is well-positioned to leverage growing Nordic and Baltic Sea defense priorities and Germany’s expanding defense role, given the company’s strength in electronic warfare equipment.

Leonardo benefits from increased European defense spending, particularly in electronics and its land vehicle JV with Rheinmetall. It could gain further if Europe lifts its defense debt cap, as Italy and Spain may struggle to reach the 2% GDP target by 2029.

Key Morningstar Metrics for Rheinmetall RHM

Fair Value Estimate: EUR 1310,00

Morningstar Rating: ★★★★

Economic Moat: Wide

Morningstar Uncertainty Rating: Medium

Saab SAAB B

Fair Value Estimate: SEK 371.00

Morningstar Rating: ★★★★

Economic Moat: Wide

Morningstar Uncertainty Rating: Medium

Key Morningstar Metrics for Leonardo LDO

Fair Value Estimate: EUR 42.40

Morningstar Rating: ★★★

Economic Moat: Narrow

Morningstar Uncertainty Rating: High

Jocelyn Jovene and Sunniva Kolostyak contributed to this story.


The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Lukas Strobl  is the editorial manager for EMEA at Morningstar.

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