Defense stocks tumbled on Wednesday after reports that Germany would abandon plans to build six warships, raising investors’ fears that a boost to defense contractors from increased government spending may not fully materialize.
Berlin plans to cancel its multibillion-euro project to build F126 frigates, the Financial Times reported, citing people familiar with the matter. It was to be the largest warship commission since World War II. Instead, Berlin plans to purchase eight smaller Meco A-200 frigates, the report said.
german munitions manufacturer line metalThe company, a big beneficiary of German government contracts, fell as much as 17.3% in intraday trading, marking its worst day since 1989, according to FactSet.
The company was expected to become the main contractor for the F126 frigate program in a contract worth up to 12.8 billion euros ($14.5 billion), pending approval from the Budget Committee. After years of delays, it was to take over the contract from Dutch shipyard Damen Naval.
CNBC has reached out to Rheinmetall and the German government for comment.
The STOXX Europe Aerospace & Defense ETF traded 1.9% lower.
Other German listed stocks Hensoldt and Lenk They fell by 5.1% and 5.8%, respectively. swedish serve Italy traded 3.5% lower. leonardo fell 4.4%, with the British giant BAE Systems It fell 1.2%. Pan-European Blue Ship Stocks 600 The index traded almost flat.
So far, 2026 is looking tough for defense stocks.
The move comes as European defense stocks have fallen sharply year-to-date as sentiment towards defense companies soured as investors weighed the prospects for an end to wars in Ukraine and the Middle East and questioned how much of government military spending pledges will materialize.
Rheinmetall’s stock price fell about 30% from its January high in Wednesday trading.
With Rheinmetall and Germany pledging to achieve “Europe’s strongest conventional army” by 2039, an overhaul of the F126 program would be a blow to both countries’ defense ambitions. It also plans to acquire a 40% stake in tank manufacturer KNDS, which is scheduled for an IPO soon along with France.
A year ago, NATO allies agreed to increase defense spending from 2% to 5% of GNP by 2025, following years of pressure from Washington.
Rising military spending, including in Germany, Europe’s largest economy, makes defense an “attractive investment story,” Nalin Patel, director of EMEA private capital research at PitchBook, said on CNBC’s “Europe Early Edition” on Wednesday.
Despite recent weakness, European defense stocks have seen strong gains in recent years, with order backlogs soaring and valuations soaring.
“While there is significant market volatility, defense is an area that has shown particularly strong growth, so potentially this valuation is justified,” Patel said.
