Why European Defense Stocks Are Set to Sustain Premium Valuations Amid Military Spending Boom
European defense stocks are entering a powerful uptrend, driven by a historic shift in defense strategy and spending across the continent. As geopolitical tensions rise and Europe recalibrates its military priorities, defense budgets are set for a prolonged surge, reinforcing premium valuations for key defense players.
A Structural Shift in European Defense Spending
The reassessment of Europe’s security posture—sparked by rising geopolitical instability and a recalibration of U.S. defense commitments—has triggered a significant uptick in military investment. Barclays projects European defense budgets could climb to between 3% and 3.5% of GDP, a major shift from the long-held 2% NATO benchmark. This could inject an additional $200 billion to $300 billion into the sector, providing a powerful tailwind for European defense firms.
Revenue Growth with Structural Advantages
While European defense contractors face inherent limitations on operating leverage due to long-cycle contracts, the structural boost in government spending is expected to drive top-line growth and earnings resilience. Barclays highlights Hensoldt, Rheinmetall (ETR:RHMG), and Saab as standout beneficiaries of this multi-year budget expansion.
In contrast, BAE Systems (LON:BAES), the region’s largest defense contractor by revenue, could see muted gains due to its lower European exposure (33%), while Thales (EPA:TCFP), with approximately 50% of its revenue derived from defense and limited U.S. exposure, is well-positioned to capture greater upside.
Defense Stocks Command Premium Valuations
The sector is already pricing in the spending boom. European defense equities are trading at elevated forward P/E ratios, reflecting optimism for robust earnings growth. Barclays estimates that current valuations imply a staggering 60% EPS growth by 2026, well ahead of Bloomberg’s consensus projection of 30% EPS growth by 2028.
German firms, notably Rheinmetall and Hensoldt, are expected to deliver 35% EPS CAGR over 2026-2028, outperforming long-cycle peers like BAE, Leonardo, Saab, and Thales, which are forecast to grow earnings at approximately 20% CAGR over the same period.
Three Catalysts Supporting Continued Premium Valuations
Barclays identifies three key factors underpinning the case for sustained premium valuations in European defense stocks:
- Sustained EPS Outperformance – Relative to other industrial sectors, defense companies are expected to deliver consistently higher earnings growth as military budgets remain elevated.
- Long-Term Revenue Visibility – Multi-year defense programs and a decade-long upcycle in spending offer clear revenue predictability.
- Low Tariff Risk – The sector remains largely insulated from tariff-related disruptions, unlike other export-heavy industries.
Procurement Trends Fueling Further Upside
A structural shift toward equipment procurement is reinforcing the growth narrative. Since 2014, the share of procurement in total European defense spending has surged from 18% to 32% in 2024. However, only 50% of this procurement has been directed to European-built systems, raising concerns about strategic autonomy and potential policy shifts to favor domestic suppliers.
France has largely prioritized local defense firms, while Poland and other Eastern European nations have leaned more heavily on foreign suppliers. The forthcoming European Commission White Paper on Defense and the NATO summit in June are expected to provide crucial insights into the future of procurement strategies and legislative backing for the industry.
The EU’s ReArm Plan: A Game-Changer
The EU’s ambitious ReArm plan, unlocking up to €800 billion in defense funding, is another major catalyst. The program includes €150 million in loans to promote joint procurement of critical defense systems and fiscal leeway for countries to boost military budgets without breaching broader EU financial rules.
Execution Will Be Key to Outperformance
Despite premium valuations, European defense firms with strong production scalability, resilient supply chains, and the ability to secure skilled labor will likely outperform. Barclays emphasizes that companies capable of translating increased defense budgets into timely deliveries and efficient operations will capture the lion’s share of new contracts.
While the sector’s margin expansion potential is somewhat constrained by the nature of government contracting, the visibility of defense orders and funding certainty provide a solid foundation for sustained earnings growth.
Outlook: German Defense Stocks Lead the Charge
Barclays notes that German defense names, such as Rheinmetall and Hensoldt, have been among the sector’s best performers, buoyed by their exposure to Europe’s spending surge and robust backlogs. Saab and Rheinmetall currently trade at the highest relative forward P/E multiples, yet Barclays believes their lofty valuations are justified by superior earnings momentum.
Conclusion
With European defense spending in the midst of a structural uptrend, investors can expect the sector to maintain its premium status—supported by long-term revenue visibility, government-backed demand, and the continent’s push for defense autonomy. For discerning investors, European defense stocks remain a compelling opportunity in a volatile macro landscape.
