European defense stocks slide as investors question long-term military funding

European defense sector shares have begun to decline following a multi-year upward trend, marking a shift for the continent’s major arms manufacturers.

According to a report by the Financial Times, investors are increasingly concerned that European nations will struggle to secure rapid funding to finance their projected large-scale increases in military spending.

Since the beginning of the year, the Stoxx Europe Targeted Defence index, which tracks Europe’s largest defense companies, has fallen by more than 15%. During this period, shares of prominent firms such as BAE Systems, Rolls-Royce, Thales, Leonardo, and Rheinmetall have remained under pressure.

Following the start of the military campaign in Ukraine, defense industry shares rose rapidly on expectations that governments would actively purchase weapons and expand their defense budgets. However, investors have now grown skeptical about whether these plans can be fully implemented.

Indeed, several states have already encountered difficulties in executing their defense programs. Germany decided to withdraw from a joint fighter jet project with France valued at approximately €100 billion, while Czech Prime Minister Andrej Babis indicated that his country might not even be able to reach the current NATO defense spending target of 2%.

Analysts note that investors now want to see concrete contracts, orders, and profit growth from companies, rather than relying solely on promises of budget increases.

Another factor driving the decline in share prices is the shifting nature of warfare. Investors are increasingly pivoting away from manufacturers of tanks and other heavy military vehicles toward companies that produce unmanned aerial vehicles (UAVs), missiles, and advanced military technology.

As a result of this trend, shares of French drone manufacturer Parrot have gained approximately 36% since the start of the year, while shares of Swedish military IT firm MilDef have risen by approximately 60%.

Previous declines in defense stocks

The drop in European defense shares is not without precedent. In August last year, shares experienced a sharp decline following a meeting at the White House between US, Ukrainian, and EU leaders.

In November, shares fell to their lowest level since late August after Ukrainian President Volodymyr Zelenskyy indicated readiness to work on a US-proposed plan to end the conflict.

During that period, the aerospace and defense sector index recorded a 3.3% decline, underperforming the broader Stoxx index, which lost 1%, with German companies experiencing the most significant losses.

Another sharp decline occurred in April this year following US-led strikes against Iran. Despite ongoing conflicts, production delays and uncertainties surrounding military budgets have continued to unnerve investors.

European Commission prepares to increase defense budget

Conversely, in April, the European Commission announced that it would invest €1.07 billion in 57 defense projects designed to support Europe’s core defense capabilities.

Of this funding, €675 million was allocated to 32 initiatives aimed at developing defense capabilities, while €332 million was designated for 25 research projects.

The European Commission stated that these investments will support the goals outlined in the EU’s defense readiness roadmap through 2030 and provide critical funding for four key flagship initiatives.

During the same period, it was reported that the European Commission plans to increase defense spending to at least €131 billion in the new seven-year budget covering the years 2028 to 2034.

Andrius Kubilius, the EU Commissioner for Defense and Space, noted that this figure represents an unalterable “absolute minimum.”