Thematic Spotlight: Europe Plans to Spend Big on Defence

European markets are on a tear, and defence stocks are leading the charge. As the continent faces increasing geopolitical uncertainty and shifts in US foreign policy, investors are betting big on a European military resurgence.

The renewed focus on defence comes as European leaders pledged to ramp up military spending in response to growing concerns over Russian aggression and the US’s shifting stance on NATO. At an EU defence summit held in Brussels earlier this month, officials backed new policies to increase fiscal flexibility for military spending and proposed a €150 billion joint borrowing plan to modernise European defence capabilities.¹ The message from European leaders was clear: the continent can no longer rely on the US for security and must develop independent military strength.²

In the same week as the announcements, the Stoxx 600 Index hit a record high, led by double-digit gains in domestic defence contractors such as Rheinmetall, Saab, Leonardo, and BAE Systems.³ But beyond immediate market movements, structural changes in defence procurement and investment could provide long-term tailwinds for European defence stocks overall. Analysis by Bloomberg shows that NATO’s 15 largest European members may need to increase military spending by US$340 billion annually to US$720 billion in order to conduct divergent foreign policy from the US.⁴ Governments are also expected to favour domestic defence manufacturers with this spending as to support local economies while offsetting the fiscal impact of increased military budgets.⁵

As Europe reshapes its military strategy, the defence sector is emerging as an area of opportunity for global investors. If geopolitical risks persist and governments follow through on spending commitments, European equities—particularly in defence—could continue to outshine their global counterparts.

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