When diplomacy fails, the next step is obvious: It’s time to increase defense spending.
After Friday’s explosive meeting between President Donald Trump and Ukrainian President Volodymyr Zelensky, what’s clear to all is that US support of Ukraine is waning. Since this leaves Europe left holding the ammo bag, defense stocks within Ye Olde Continent skyrocketed to record highs on Monday. Some highlights:
- The STOXX Europe Total Market Aerospace & Defense ETF spiked by 8.71%, its biggest one-day rally in around five years.
- German arms manufacturer Rheinmetall rose 13.41%.
- United Kingdom’s aerospace defense company BAE Systems jumped 17.10%.
On Sunday, leaders from the EU, UK and Canada convened in London to hash out ways they can step up their defenses where the US may be leaving off.
“We urgently have to re-arm Europe,” European Commission President Ursula von der Leyen told the press. “After a long time of under-investment, it is now of utmost importance to step up the defense investment for a prolonged period of time.”
Last year, the EU spent 1.9% of its combined GDP on defense. But NATO Secretary General Mark Rutte has insisted that European military spending should be “north of 3%.”
Will Euro defense stocks soar this year?
Although Friday’s White House showdown sparked today’s rally, a defense-spending shakeup has been unfolding ever since Trump took office.
“European nations have already been reassessing their defense strategies and increasing military spending in the face of Trump's mercurial foreign policy,” wrote John Engle, senior fellow of the New Hegemony Institute, via emailed statement.
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This has already created a shift in markets that will likely stick around for years to come.
“So far in 2025, the seven stocks that make up the MSCI EMU Aerospace and Defense Index have gained over 20%, leaving the US’s Magnificent Seven stocks at a stall,” wrote Chief Global Investment Strategist at Charles Schwab Jeffrey Kleintop. “The prospect of Trump pulling support for Ukraine has further raised expectations for more European defense spending. If the percentage climbs to 3%, it may translate to 800 billion euros by 2029, almost four times the level of the mid-2010s.”
Meanwhile, US defense companies have been sputtering: General Dynamics, Lockheed, L3Harris, and Northrop are all down around 15% since the presidential election on November 5.
Zoom out: President Trump has also voiced a desire to cut US defense spending in half, saying, “There’s no reason for us to be spending almost $1 trillion on the military.” And in response to DOGE pressure, the Pentagon has proposed cutting 8% of its budget for each of the next five years in an effort to slim down its spending—all of which suggests that US defense stocks could be in for a rough road ahead, while leaving European defense stocks more room to run.—JD