European defence stocks are enjoying a blistering start to 2026, as US threats to take control of Greenland and tensions with Venezuela reignite a rally in one of last year’s hottest equity market sectors.
The Stoxx Europe Aerospace and Defence index has surged nearly 15 per cent this month, equivalent to more than one-quarter of its record-breaking gains last year. Among the biggest risers are Sweden’s Saab, up 32 per cent, Germany’s Rheinmetall, up 22 per cent, and the UK’s BAE Systems, which has risen 22 per cent.
The US’s shock capture of Venezuela’s leader Nicolás Maduro and President Donald Trump’s repeated demand that the US must “have” Greenland — including his refusal to rule out military action to do so — have led investors to bet European governments will have to keep on raising defence spending for some time to come, benefiting domestic suppliers.
Higher defence spending “drove share prices up enormously over the past couple years . . . [and] now we’ve had this massive rally again”, said Nick Cunningham, analyst at Agency Partners.
The past two weeks have provided “ample evidence that the US is not a reliable ally for Europe anymore, so Europe is going to have to develop its own capabilities”, which is boosting its defence stocks, he added.
The index has more than tripled since Russia’s full-scale invasion of Ukraine in early 2022, as investors piled into lowly-valued companies that had long lagged behind their US counterparts.
The gains accelerated in the wake of Trump’s return to office a year ago, as Washington demanded Europe take more responsibility for its own security. European leaders and other Nato members in June pledged to raise defence spending to 5 per cent of GDP. But the rally petered out towards the end of the year as investors pondered the prospect of a peace deal in Ukraine.
However, performance picked up sharply at the start of this month when Maduro’s ousting was followed by US threats of military action against Iran in response to its brutal crackdown on protesters. In Greenland, Nato troops are set to be a “more permanent” presence, according to Denmark’s defence minister, with Germany, the UK, France, Finland and the Netherlands saying they will make modest troop deployments to the island.
Evelyn Chow, a portfolio manager at Neuberger Berman, said Washington’s actions in Venezuela and Greenland “underscore the inherent tension between EU national sovereignty [and] the historical relationship with the US as an ally”, and “catalyse even greater urgency on the part of EU nations to shore up their domestic defence industrial base”.
Saab, Rheinmetall and BAE have been among the primary beneficiaries of higher European military spending since Russia’s invasion of Ukraine and are sitting on record order books.
Saab, which builds the Gripen fighter jet as well as multiple weapon systems including sensors, is seen as a big beneficiary of Sweden’s rearmament drive. The Scandinavian country this week said it would spend $440mn on unmanned military drone systems.
BAE, which builds all the nuclear submarines for Britain’s Royal Navy, is benefiting from higher nuclear spending at home, while its US business stands to benefit from increased spending under Trump.
Rheinmetall has set out ambitious financial targets, including a promise to deliver €50bn of annual sales in 2030, five times what it reported in 2024. The company has also expanded into new areas including building warships and satellites.
Ammunition maker Czechoslovak Group on Wednesday confirmed plans to launch an initial public offering in Amsterdam in the next few weeks, confirming an earlier FT report.
While defence stocks globally are on a roll, the rally in Europe is again outpacing that in the US, where the S&P 500 Aerospace & Defense (Industry) sub-index is up 11 per cent this month, after rising 40 per cent in 2025.
Lockheed Martin is up 20 per cent, Boeing 14 per cent and Northrop Grumman 17 per cent. Among smaller companies, submarine maker Huntington Ingalls has risen 25 per cent, while drone manufacturer AeroVironment is up 62 per cent.
The sector initially climbed after the US’s Venezuela operation, then tumbled on Trump’s threats to limit dividends and buybacks. Those losses were swiftly recouped following the president’s calls for Congress to increase the US defence budget by 50 per cent to $1.5tn.
However, Rob Stallard, analyst at Vertical Research, said Trump’s proposed defence spending increase was “aspiration rather than real policy”, adding that investors were questioning the feasibility of a 50 per cent spending increase given the impact on the government deficit. “People are not pricing in 50 per cent, let’s put it that way,” he said.
The huge rally in Europe and elsewhere is also prompting caution from some analysts and investors, who warn high valuations could potentially limit further gains. On Tuesday, Deutsche Bank downgraded BAE, Leonardo and French company Thales from buy to hold.
Agency Partners’ Cunningham said: “For all our confidence in the upside of the sector, you’re getting to the point where [prices are] fully discounting the upside, and therefore they become vulnerable again to any suggestion that it might not happen according to plan. You end up with a bit of fragility.”
Data visualisation by Ray Douglas