London/Frankfurt/Paris, March 5, 2025 – European defence stocks witnessed a significant rally on Monday, as investors bet on increased military spending across the continent. The surge came in response to US President Donald Trump’s reluctance to guarantee European security, prompting European governments to reconsider their defence strategies and military funding.
European Defence Stocks Reach Record Highs
Shares of leading European defence companies soared as concerns over geopolitical instability and military preparedness drove investor confidence in the sector.
- Germany’s Rheinmetall closed 15% higher, reflecting optimism about increased orders for military vehicles and munitions.
- Leonardo, Italy’s top defence firm, surged 17.3%, as analysts predicted a sharp rise in defence contracts.
- France’s Thales jumped 16.7%, driven by expectations of expanded cybersecurity and aerospace spending.
- UK-based BAE Systems gained 14.3%, continuing its strong performance amid rising global defence expenditures.
- Sweden’s Saab rose 11.6%, fueled by increasing interest in European-made fighter jets and military technology.
The Stoxx Europe Aerospace & Defence Index soared 8%, marking its biggest one-day jump since November 2020. Meanwhile, Germany’s DAX index surged 2.6%, its strongest gain in over two years, reflecting broad investor confidence in the region’s military-industrial sector.
Trump’s Stance on European Security Sparks Market Reactions
The market surge followed a high-stakes summit in London, where European leaders—led by the UK and France—sought to salvage a diplomatic resolution for Ukraine.
Trump’s recent remarks during a tense Oval Office meeting with Ukrainian President Volodymyr Zelenskyy fueled uncertainty over Washington’s commitment to NATO and European security. The prospect of a US withdrawal from key defence alliances has led European policymakers to consider significant increases in military spending.
In response, investors are anticipating larger defence budgets across Europe, which could translate into lucrative contracts for European arms manufacturers.
Impact on Bonds and Currency Markets
The prospect of higher European military spending led to significant movements in bond and currency markets:
- European government bonds saw a sell-off, pushing the 10-year German Bund yield up by 0.1 percentage points to 2.49%.
- The spread between 10-year and two-year German debt widened to its highest level in over two years, signaling expectations of long-term defence spending commitments.
- The euro strengthened by 1.2% to $1.046, buoyed by reports that Zelenskyy was open to further diplomatic talks with Trump and by slightly stronger-than-expected Eurozone inflation data.
Europe’s Shift Toward Military Expansion
The surge in defence stocks builds upon a record-breaking trend that began after Russia’s full-scale invasion of Ukraine in 2022. European defence shares have already climbed over 30% in 2025, as governments signal a long-term pivot toward greater military investments.
Among the key initiatives under discussion:
- The creation of a European Rearmament Bank, modeled on the European Bank for Reconstruction and Development (EBRD), to tap into Europe’s vast savings pool to finance military expansion.
- A multibillion-euro boost to Germany’s military budget, backed by incoming Chancellor Friedrich Merz, who has called for a constitutional amendment to enable over €100 billion in additional defence spending.
- Increased investment in European-made fighter jets, warships, and cybersecurity infrastructure, as the continent looks to reduce its reliance on US military aid.
Germany Takes the Lead in Military Expansion
Germany is emerging as the driving force behind Europe’s defence transformation. Friedrich Merz, who is set to take over as Germany’s next chancellor, has pushed for an immediate increase in military spending, arguing that Germany can no longer afford to depend solely on NATO guarantees.
Germany’s Bundestag is expected to debate a proposed €100 billion defence package, which would represent one of the largest military budget expansions in German history.
Robin Winkler, an economist at Deutsche Bank, described this shift as a “paradigm shift” in German military policy, highlighting that Berlin’s approach to defence is evolving from a post-Cold War pacifist stance to a more proactive security doctrine.
Cautious Optimism Despite Market Enthusiasm
While investors celebrated the surge in defence stocks, some analysts remain cautious about the pace of military spending. European governments are known for bureaucratic delays, and major budget reallocations often require extensive political negotiations.
Tomasz Wieladek, an economist at T. Rowe Price, remarked:
“The rise in defence spending is likely to be slow and steady, rather than the ‘Big Bang’ markets expect. While military budgets are expected to grow, the timeline for actual contract execution remains uncertain.”
Despite these concerns, the overall sentiment in financial markets remains bullish, with European defence contractors set to benefit from the continent’s shift toward military self-sufficiency.
Conclusion: The Future of European Defence and Market Implications
The surge in European defence stocks underscores the growing urgency for increased military investments amid geopolitical uncertainty and shifting global alliances.
With Trump’s stance on NATO creating uncertainty, European governments are accelerating their efforts to strengthen their own military capabilities. This shift is expected to benefit major European defence firms, which are positioned to secure billions in new contracts in the coming years.
However, while the short-term market reaction has been overwhelmingly positive, the long-term implementation of these defence commitments remains a key challenge. Investors and policymakers alike will be closely watching developments in European military budgets, political negotiations, and potential diplomatic efforts with the US.
As Europe prepares for a new era of strategic autonomy, the defence sector is set to remain a focal point for both financial markets and global security discussions in 2025 and beyond.
