European defense stocks soar amid Ukraine aid uncertainty

Shares in European defense companies rallied yesterday following Ukrainian President Volodymyr Zelenskyy’s visit to the Oval Office on Friday, which ended in a fiasco.

The rally was fueled by news that Donald Trump might suspend military aid to Ukraine, which appears unwilling to accept a ceasefire with Russia without security guarantees. This led to the belief that Europe would need to significantly increase its own arms spending and support Ukraine without US assistance.

Additionally, investors were excited by the prospect of European leaders meeting this weekend to show unity with Ukraine and signal their commitment to strengthening joint defense.

With the support of rapidly rising defense stocks, the European Stoxx 600 index has outperformed the S&P 500 in year-to-date returns.

Europe’s largest arms manufacturer, UK-based BAE Systems, rose approximately 19% yesterday, while France’s Thales increased by 23%, Germany’s Rheinmetall by 14%, and Italy’s Leonardo by 16%.

The European Stoxx Aerospace and Defense index rose by approximately 8%, marking a 30% increase since the beginning of the year.

Analysts suggest that even if Ukraine and Russia cease fighting, European countries will likely continue spending to arm themselves and Ukraine.

According to Morningstar Defense Analyst Loredana Muharremi, European military spending could reach 3.5% of GDP by 2032, significantly exceeding the current NATO target of 2%.

Meanwhile, AlphaValue Analyst Saima Hussain estimates that Europe’s annual defense spending could increase by $156 billion.

However, some analysts warn that European defense industry giants may lack the capacity to rapidly increase arms production, while others point out that European bureaucracy moves too slowly.

European Union leaders are scheduled to meet in Brussels this Thursday and are expected to announce details on how they will collectively finance defense efforts.

The first step in this context was the 150 billion euro package announced by Commission President Ursula von der Leyen, which will finance arms through joint borrowing.

It is estimated that the EU’s armament spending could reach up to 800 billion euros.