Investors are buying into a “megatrend” in European defense spending that is expected to continue over the next decade, fueled by a combination of EU, state and private capital funding. With some of Europe’s leading defense stocks soaring to returns of nearly 20% in the first week of 2026, investors now see the sector as a long-term bet, shaped by both current tensions over Venezuela and Greenland and long-term concerns about the continent’s defense capabilities and the future of NATO. Rafael Tuin, head of capital markets strategy at Tikehau Capital, said multiple factors, including the continued threat from Russia and the end of the U.S. defense umbrella in Europe, are supporting what he calls “the megatrends that are forming.” Tuyn said Europe’s security was “depleted” after decades of underinvestment and now needed urgent action. “Regardless of Ukraine, regardless of the peace plan, which we obviously hope will be signed soon, this trend should go further. Given the potential threat that Russia represents to Russia and European countries, that is not going to go away,” Tuyn said on CNBC’s “Early Edition of Europe” last week. He added that the end of the US defense “umbrella” over Europe is a central pillar of the investment thesis. “Whatever government comes next, it will certainly not replace European security,” he added. RHM-DE YTD Mountain Line Metal. Defense stocks soar The geopolitical turmoil that underpinned the first week of 2026 has put the world’s defense capabilities in the spotlight. After U.S. forces overthrew Venezuelan President Nicolas Maduro on January 3, tensions over Greenland reignited, raising the possibility of a rift within NATO. President Donald Trump has claimed that the United States “needs” Greenland for “national security,” raising questions about the future of the Transatlantic Alliance and putting Europe’s long-term defense capabilities under new scrutiny. Separately, France and Britain last week signed a letter of intent to send troops to Ukraine if a peace deal is reached. Aneeka Gupta, director of macroeconomic research at WisdomTree, said stalled Ukraine peace efforts, tensions in Greenland, and the Venezuelan operation are all contributing factors to national defense in 2026 following a record year in 2025. “(They) justify Europe’s decisions to lock in much higher spending, concentrate critical capabilities locally, and strengthen its multitrillion-dollar rearmament pipeline,” Mr. Gupta said in the memo. German defense giant Rheinmetall is up 22.8% since the beginning of the year, while Italian peer Leonardo is up 19.7%. Tank parts maker Lenk rose 23.1%, while radar and surveillance specialist Hensoldt rose 25.6%. Swedish fighter jet maker Saab has posted a year-to-date gain of 29.9%. The Stoxx European Total Market Aerospace & Defense Index ended 2025 with a gain of 56.5%. Despite rising expectations for growth and profits, European defense stocks still trade at a discount to their U.S. peers, with European defense stocks trading at a P/E ratio of around 28 times, compared to more than 30 times in the United States. “The margin for error is limited, and that’s part of the risk of investing in defense stocks,” Tuin said. “You may see some differentiation between stocks now, but if you look ahead two, three or five years, those stocks will no longer be so expensive.” Investors point to spending commitments at both national and European Union levels, including the €800 billion ($841 billion) European Rearmament Initiative and greater political support for mobilizing private capital. Commenting on the stock market outlook, Helen Jewell, international chief investment officer at BlackRock Fundamental Equities, said: “We believe defense companies are supported by the EU and NATO’s long-term military spending plans, regardless of short-term fluctuations due to geopolitical developments.” “We know that we are currently targeting 2.5% of GDP for military equipment and military spending, and up to 5% if you include security and cybersecurity. This will take years to roll out,” Tuynh said. LDO-IT YTD Mountain Leonardo. He added: “There is also a strong desire among European governments to secure private capital investment in this sector as well. European savings can also fund this drive towards greater resilience and sovereignty in defense and other areas. This is also a very encouraging sign and will probably be a long-term trend.” Fawaz Chaudhry, chief investment officer at Fulcrum Asset Management, told CNBC’s “Europe Early Edition” on January 5 that the “hard power” shown by the United States in Venezuela on Saturday was a “signaling exercise” that could trigger “more military spending, more rearmament in Europe and Asia.” Meanwhile, Tuyn said European defense stocks stood to benefit from both greater regional sovereignty and increased military spending within the region, as well as increased demand from outside the continent, where these companies are major exporters. “We’re seeing this military horse racing happening elsewhere,” he added. “Orders from both Europe and outside Europe are likely to increase.”Gupta also emphasized the importance of this new era of hard power for defense investors. “The new catalyst tilts the balance even further toward European contractors, who enjoy a cleaner capital return story, direct budget tailwinds from multiple sectors, and a growing premium for Europe’s strategic autonomy over the politically more volatile U.S. security umbrella,” Gupta noted. Tikehau itself has already made “significant investments” in this trend, with $3 billion in assets allocated to defense and cybersecurity, Tuin said. He acknowledged the potential for short-term volatility if a durable peace deal is reached in Ukraine, allowing defense stocks to fall in the second half of 2025, but urged investors to focus on the long-term outlook. “Currently, many European munitions manufacturers are focused on supplying equipment to Ukraine, mainly tanks, armored vehicles and ammunition,” he said. “But soon after that, we need to rebuild our military capabilities in Europe. We have a wide range of equipment to deal with: missiles, air defense systems, fighter jets, warships.”
