The European defense sector has witnessed remarkable growth, with its market valuation surpassing that of the technology sector in 2025, Bloomberg reports.
Driven by rising geopolitical tensions and increased government spending commitments, defense stocks have become a focal point for investors, drawing comparisons to past investment booms in media, technology, and banking.
Defense companies have been among the best-performing stocks in Europe this year. Six out of the top ten performers in the Stoxx 600 index belong to the sector, while a Goldman Sachs defense industry basket has surged over 60% in 2025. Companies such as Rheinmetall AG, Thales SA, and Leonardo SpA continue to attract strong investor interest, as European nations increase their defense budgets, particularly in response to ongoing conflicts and geopolitical uncertainty.
This surge in defense stocks echoes previous market cycles, such as the technology boom of the early 2000s and the banking rally during the 2009 financial crisis. A rolling two-month returns analysis highlights the sector’s rapid ascent:
| Sector | Best 2-Month Rolling Return | Date |
|---|---|---|
| Stoxx Banks | 95% | May 2009 |
| Stoxx Media | 74% | March 2000 |
| Stoxx Technology | 70% | November 2001 |
| Stoxx Insurance | 67% | May 2009 |
| Goldman Sachs Defense | 66% | March 2025 |
A major catalyst for this rally has been the European Union’s proposed €800 billion defense package, which includes €150 billion in loans and an additional €650 billion in spending flexibility for member states over four years. The urgency to strengthen Europe’s defense capabilities has intensified following US President Donald Trump’s decision to halt military aid to Ukraine, prompting European nations to accelerate their own defense initiatives.
If fully implemented, this package would significantly boost the industry’s total revenue, which currently stands at just over €100 billion, according to Bloomberg data.
The defense sector’s strong performance has pushed valuations to an 80% premium over the broader European market. This premium has surpassed that of the technology sector and is approaching the levels previously seen in luxury goods, a long-time leader in European markets.
Rheinmetall, in particular, has been at the center of this rally, with its stock price increasing twelvefold since the beginning of the Ukraine conflict. The German company now boasts a market capitalization of over €50 billion, comparable to some of Europe’s largest blue-chip firms. Analysts predict that if EU defense spending reaches 3% of GDP, Rheinmetall’s revenue could quadruple to €40 billion by 2033.
Projected earnings growth for key defense firms supports the optimism:
| Company | 2025 EPS Growth | 2026 EPS Growth |
|---|---|---|
| Rheinmetall | 43% | 43% |
| Saab | 30% | 23% |
| Kongsberg | 24% | 19% |
| Hensoldt | 22% | 24% |
Despite record-high valuations, investor confidence remains strong.UBS Group AG strategist Gerry Fowler notes that as long as earnings forecasts continue to improve, concerns over high stock prices will be secondary to growth potential.
JPMorgan strategists also remain positive, maintaining an overweight stance on aerospace and defense, despite a more cautious outlook on European equities overall. They suggest that any short-term dips, such as those caused by potential cease-fire agreements, could be seen as buying opportunities.
