Europe’s Defense Stocks Rally Has Much Riding on NATO Summit

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(Bloomberg) — A fledgling rebound in European defense stocks faces a test this week, as investors look to a NATO summit for further clarity on member states’ defense spending plans.

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Anticipation the meeting will yield additional funding for the military has lifted a Goldman Sachs Group Inc. basket of European defense names to the highest in just over a month. It’s recovered 17% from a 2026 low reached toward the end of June ahead of the two-day event in Ankara, where US President Donald Trump is likely to heap more pressure on other nations to boost defense spending to 5% of annual economic output. 

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Russia’s escalating attacks on Ukraine may also be adding urgency to the issue, by highlighting shortages of air defense systems in Kyiv’s arsenal. Ukrainian leader Volodymyr Zelenskyy is likely to use the summit to press Western allies to supply his country with additional weapons.

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“We see the NATO Summit as a key catalyst for European defense,” Morgan Stanley analysts led by Marie-Ange Riggio wrote. “We expect stronger EU commitments and reiteration of US calls for defense spending to drive market confidence in the multiyear cycle, which we think offers an attractive entry point.”

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Defense stocks have trailed the broader European market this year, rising just 3.4% amid doubts over how much of the military spending promised by governments will actually materialize. The Stoxx 600 index, on the other hand, has advanced almost 10%. 

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Investors have also become more selective. They have rotated out of heavyweight land defense firms such as Rheinmetall AG and CSG NV in favor of air defense or military tech plays. Rheinmetall was also dealt a blow when Germany abruptly pulled the plug on a frigate program, while tank maker KNDS NV postponed its initial public offering shortly afterward. 

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Despite this year’s setbacks, Goldman’s defense basket has notched gains of just under 500% since Russia’s 2022 invasion of Ukraine. Last year, it rose 90%, as pressure from Trump induced NATO allies to agree to spending 5% of GDP on re-armament by 2035. Of that, 3.5% is earmarked for military equipment and personnel, while the rest will be spent on items such as cybersecurity.

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There are some signs governments are following through on those commitments. On Tuesday, Italy’s Repubblica newspaper reported the country may raise military and security spending by about €17 billion ($19.4 billion) over two years. Mediobanca analyst Alessandro Pozzi expects Leonardo SpA and Fincantieri SpA could benefit from the plan, which “would support a strong acceleration,” in funding. 

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In Britain, a defense investment plan published last week committed an additional £15 billion ($20 billion) to overhaul the military, a move Morgan Stanley says is likely to boost shares in BAE Systems Plc and Rolls-Royce Holdings Plc. 

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Meanwhile, Germany’s Thyssenkrupp Marine Systems GmbH is on track to win a €12 billion German warship contract, while Canada is set to award award it a submarine procurement deal that could be worth $70 billion over several decades. Its shares have rallied 25% since the start of this month.

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“Europe remains the region with the strongest momentum,” Riggio’s team wrote. “European governments are prioritizing conventional land forces, integrated air and missile defense, and long-range fires.”

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—With assistance from James Cone.

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