Europe’s rush to boost military spending has sent defence stocks on a tear, with shares in companies like BAE Systems, Rheinmetall, and Thales reaching record highs. The surge follows an already record run for the sector, which has more than doubled in value since Russia invaded Ukraine.
Investors are now wondering how much more they’re willing to pay for exposure to Europe’s biggest rearmament buildup since World War Two. Defence stocks trade at high valuations, with some companies’ shares selling for 21-34.5 times earnings, surpassing those of their American peers.
The European aerospace defence index has risen 170% since the Ukraine invasion, and fund managers are taking a cautious stance due to concerns over production capacity constraints and risks from scenarios like a more friendly Ukraine ceasefire or issues with state budgets.
Despite this, many believe that Europe’s leaders will lift defence spending permanently to 3% of gross domestic product, which could pave the way for a big injection of new funds into a 100-billion euro fund. Investment banks have raised their profit estimates and ratings, but some are warning of a potential pullback given the high valuations.
Industry experts predict that defence stocks will remain attractive in the long term, driven by growth sectors in Europe. However, investors are advised to be cautious and understand the earnings impact and sustainability of increased defence spending.
Source: https://www.reuters.com/markets/europe/beyond-fundamentals-is-europes-arms-race-priced-2025-03-04