European Defense Stocks Soar Amid Looming Transatlantic Split

European defense stocks surged Monday amid a widening rift between Europe and the United States following US President Donald Trump’s acrimonious press conference with Ukrainian President Volodymyr Zelenskyy on Friday. The event prompted a weekend scramble among European officials to offer Ukraine separate security assurances and fueled a growing push for European governments to significantly increase their defense spending.

Among the largest defense companies, Germany’s Rheinmetall RNMBF and Italy’s Leonardo DRS each jumped 11% to start the day, while BAE Systems BAESF was up 15%. France’s Thales THLLY rose 14%, and aircraft makers Dassault Aviation DUAVF rose 15% and Saab SAABY rose 9%. Turning to smaller companies, defense electronics group Hensoldt HAGHY rose 22%, while Kongsberg NSKFF rose 9%. Britain’s Chemring CMGMF traded 8% higher, and Qinetiq Group QNTQF was up 7%.

“European defense stocks continue to rally on the back of the latest developments, including talks about a potential US pullback and increasing pressure from the US for Europe to boost defense budgets,” says Morningstar aerospace and defense analyst Loredana Muharremi.

US Defense Stocks Lag

While European defense names have surged, the latest turn of events has left US defense stocks behind. For example, Lockheed Martin LMT stock was essentially flat on Monday, while Northrop Grumman NOC gained 2%. “Investors expect a pullback in US support and for Europe to ramp up its defense spending, prioritizing European companies,” Muharremi notes.

Europe’s aerospace and defense sector has sharply outperformed broader markets since the beginning of the year, propelled by an emerging consensus that NATO’s decade-old defense spending target of 2% of GDP is inadequate and needs to be raised. “We expect European defense spending to reach 3.1% of gross domestic product by 2029, and 3.5% by 2032. We believe a 3.1% defense spending target by 2029 is feasible if this is strategically structured, with debt financing potentially supporting the growth, and focuses on European production and research and development,” Muharremi explains.

European Defense Spending to Ramp Up

Even before Monday, the sector’s rally had accelerated in February, as Trump leveled allegations against Zelenskyy which cast doubt on the US’ continued willingness to push Russia toward peace, as well as its preparedness to help defend Europe in case of further escalation.

In a note published Monday morning, JPMorgan analysts raised their 12-month price targets for European defense stocks by an average of 25%. “We expect significant increases in consensus estimates / company guidance in the coming months and years. We also expect the European Defence Sector to further re-rate as investors underwrite strong growth and visibility,” David H. Perry and Lucy Fitzgerald wrote.

Morningstar’s Top Picks in European Aerospace and Defense

While all European defense contractors benefit from this trend, these are Muharremi’s favored names. Here’s a closer look at these three stocks.

Rheinmetall

Rheinmetall is a key beneficiary due to Germany’s defense spending surge, with strong positions in munitions, land vehicles, and air defense, according to Muharremi.

Saab

Muharremi sees Saab as well-positioned to leverage growing Nordic and Baltic Sea defense priorities and Germany’s expanding defense role, given the company’s strength in electronic warfare equipment.

Leonardo

Leonardo benefits from increased European defense spending, particularly in electronics and its land vehicle JV with Rheinmetall. Muharremi says it could gain further if Europe lifts its defense debt cap, as Italy and Spain may struggle to reach the 2% GDP target by 2029.

Download Morningstar’s Global Defense Sector Landscape report here.

Jocelyn Jovene and Sunniva Kolostyak contributed to this story.