Published Date: April 10, 2025 | Author: Tom Bailey
After decades of neglect and complacency, Europe is finally waking up to the hard truths of geopolitics. Russia’s invasion of Ukraine was the first catalyst. NATO’s 2% of GDP defence spending requirement, once aspirational, has become political orthodoxy – and is expected to go higher.
At the same time, the US has taken an increasingly isolationist stance, worrying European leaders about its commitment to the NATO alliance. Serious sums of money are now being committed, such as with EU’s Rearm Europe/Readiness 2030 – a blueprint for strategic autonomy and industrial sovereignty. Europe no longer wants to outsource its security.
But Europe is still playing catch-up. Compared to the United States, the continent is five years behind – held back by fragmented procurement, chronic underinvestment, and a market still too reliant on imported kit. That’s changing fast. The new EU defence plan mandates that 65% of defence equipment must now come from within the EU, Norway, or Ukraine.
Rearm Europe/Readiness 2030 is not a modest initiative. Backed by €800 billion, it includes a €150 billion facility to help finance the defence revival. The plan aims to plug Europe’s capability gaps and supercharge investment in next-gen technologies: AI, quantum computing, autonomous drones, cyber warfare.
And the companies best placed to deliver that transformation are still trading at valuations that potentially don’t reflect what’s coming. Despite trailing P/Es around 29 and forward multiples at 23, earnings expectations remain strong and are still rising. Crucially, analysts have barely begun to price in the implications of the Rearm Europe plan, which only landed in mid-March 2025.
Source: VettaFi, data as of 04.04.2025, For Q4 2024, 20 of 35 companies (57%) have reported. 14 companies (70%) have reported positive YoY EPS growth, 19 companies (95%) have reported positive YoY sales growth. Past performance is not indicative of future performance. For illustrative purposes only.
This is not a one-year story. It’s a multi-year defence cycle unfolding in real time. And as budgets rise and demand firms, analysts may revise up their numbers.
If there’s a gift from Washington, it’s the recent selloff triggered by Trump’s tariff threats. European defence stocks were caught in the drawdown. But the fundamentals haven’t changed. If anything, Trump’s destabilising approach to global trade will reinforce Europe’s push for strategic independence.
Ben Heelan, head of EMEA aerospace and defense research at Bank of America notes that the tariff impact on Europe’s defence sector will be “pretty small”, adding that current stock price levels represent a “great opportunity” for investors. Morningstar’s Loredana Muharremi agrees. Many of the continent’s biggest players – BAE Systems, Rheinmetall, Thales, Saab, Leonardo – already have a manufacturing footprint in the US. Their US manufacturing presence should help provide a hedge against tariffs.
Meanwhile, Europe’s defence budgets continue to rise—and in some cases, aim beyond the 2% NATO target. A 3% of GDP goal is no longer unthinkable. As Heelan notes, that gives Europe’s defence sector a 10-year growth runway.
Investors looking at European defence today may not be late to the party. They could be early. The rearmament of Europe is only just beginning – and the political will, financial firepower, and industrial ambition are all in place. Long-term optimism in this sector can also be seen by venture capital funding hit a record €5.2 billion in 2024.
The last few decades were defined by disarmament. The next few may be defined by its reversal.
Future of European Defence UCITS ETF (ARMY) aims to provide exposure to NATO and NATO+ ally defence and cyber defence spending, ex-US.
With threats mounting and US support no longer guaranteed, European NATO members are overhauling their defence strategies and sharply increasing military spending. After a decade of failing to meet the 2% of GDP target, Europe has collectively underspent by an estimated €850bn. Now, to rebuild and modernise their armed forces, governments are directing this renewed investment towards European defence firms – boosting the continent’s strategic self-reliance.
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