European defense stocks surge as military budgets soar
European defense stocks see strong growth as military budgets climb
A surge in European military spending has sparked a rally in defense stocks, pushing their valuations to levels comparable to luxury brands like LVMH and Hermès.
Key Takeaways
- European defense companies, including Rheinmetall, Thales, and Leonardo, have seen their share prices soar. Rheinmetall's stock has jumped over 80% this year, driving its valuation to new highs.
- Investor optimism is high, fueled by Germany’s commitment to boost military spending, with hopes that other EU countries will follow suit.
- As defense stocks continue to rally, valuations have outpaced analysts' ability to adjust price targets. Rheinmetall's price target has risen by 60%, but it still suggests limited upside in the short term.
The Surge in Defense Stocks
European defense companies have become some of the hottest stocks this year, with shares in Rheinmetall, a German tank and ammunition producer, rising more than 80%. This rally has driven their valuation multiples into territory usually reserved for luxury brands like LVMH and Hermès, reports Bloomberg.
Other major players in the sector, such as Thales and Leonardo, have also seen significant gains, as investors rush to take advantage of the growing appetite for military spending. Investors are particularly hopeful about Germany’s recent pledge to unlock billions for defense, with the potential for other European Union countries to follow suit.
However, despite this optimism, the challenge now lies in whether these companies can meet the high earnings growth expectations that have been factored into their inflated share prices. Analysts have been slow to adjust their targets, creating potential risks for investors if companies fail to deliver.
Valuation Expectations and the Growth Outlook
The defense sector, historically a low-growth area, is now seen as having significant expansion potential. Investors are driving up share prices far faster than analysts have been able to adjust their projections, creating a disconnect between market expectations and reality.
Rheinmetall AG share price dynamics (2022 - Mar 2025) Source: TradingView
According to Graeme Bencke, a fund manager at Amati Global Investors, the outlook for defense companies has dramatically shifted. “The growth outlook for these companies is very different today than it was six months ago,” he noted, adding that the market is pricing in future growth that may not yet be fully reflected in analysts' earnings estimates.
Focus on Earnings and Government Spending
Rheinmetall’s earnings results, due this Wednesday, will be a key moment for the defense sector. The company’s strong stock performance has created a situation where analysts have had little time to upgrade their earnings forecasts, and a solid report could send its stock even higher.
Investors are particularly focused on which areas within defense will receive the most funding, and companies' guidance on future orders and earnings growth will be crucial. With government spending in the defense sector expected to rise, the future looks bright for these companies, but analysts are carefully watching to see if the earnings follow suit.
While the rally in defense stocks continues to push valuations to new highs, investors face a test: Can these companies meet the high growth expectations? With government spending set to increase, the sector is poised for potential expansion, but analysts will need to revise their predictions to match the rapid pace of change.
Reminder, a $439 billion rally in Chinese tech megacaps this year has propelled them far ahead of their once-dominant US peers, and investors believe there’s still room for further growth.
