When geopolitical tensions rise — or worse, when direct conflicts break out between major powers, as seen in Ukraine — the defense industry is one of the biggest beneficiaries, apart from gold prices, for obvious reasons (a substantial upturn in orders).    Â
Take the European Union. Between 2021 and 2024, total defense spending by EU member states increased by more than 30%. In 2021, it amounted to €214 billion; by the end of 2024, it is estimated to have reached €326 billion, approximately 1.9% of EU GDP. And this figure is expected to continue rising.    Â
But why, if U.S.-Russian relations seem to be thawing and Washington has just suspended military aid to Ukraine until Kiev demonstrates its commitment to peace, wouldn't this increase the likelihood that the conflict will end sooner rather than later?    Â
Not necessarily. First, this supposedly optimistic scenario is far from guaranteed. Even if the U.S. has suspended arms shipments, the EU seems ready to take on the financial burden of supporting Ukraine. Whether it succeeds or not will be decided at the EU emergency summit in Brussels on March 6. Â Â Â Â
The second driver of increased defense spending is the imminent risk of Trump pulling the U.S. out of NATO. In this regard, along with deteriorating relations with the U.S., European Commission President Ursula von der Leyen has sent a letter to the leaders of the 27 EU countries outlining an €800 billion rearmament plan.   Â
Meanwhile, British Prime Minister Keir Starmer recently announced that Britain would increase defense spending to 2.5% of GDP by 2027, three years ahead of schedule and up from the current 2.3%. This increase in military funding will be covered by highly controversial cuts in international aid. Â Â Â Â
French President Emmanuel Macron has gone even further, calling on European nations to increase defense spending above 3% of GDP to counter the Russian threat. Germany's likely next chancellor, Friedrich Merz, is also pushing for increased military spending. In short, these are golden times for defense contractors. Â Â Â Â
Against this backdrop, shares of defense giants such as BAE Systems, Thales Group, Leonardo S.p.A., Saab AB and Rheinmetall AG soared on Monday, lifting along major European indices such as the Stoxx 600, DAX and FTSE 100 to new all-time highs. Â Â Â Â
Interestingly, U.S. defense stocks have shown a much weaker trend. Over the past three months, shares of Lockheed Martin, Northrop Grumman, General Dynamics, Huntington Ingalls and L3Harris Technologies have all declined. Â Â Â
What next?Â
The key moment for European defense stocks will be the EU emergency summit on March 6. If member states fail to agree on increased support for Ukraine, possibly due to blockades by Hungary or Slovakia, investor enthusiasm for defense stocks could fade.Â
