German Defense Stocks: Pullbacks as Entry Points Amid Structural Spending Shifts

The recent turbulence in German defense stocks, exemplified by Rheinmetall (RHM.DE) and Hensoldt (HAGG), has created compelling entry points for disciplined investors. While short-term volatility—driven by delayed contract awards and earnings misses—has temporarily dented sentiment, the structural tailwinds reshaping Europe’s defense landscape remain unshaken. With NATO’s historic 5% GDP spending pledge by 2035 and Germany’s fiscal reforms unlocking €329 billion in military investment by 2035 [1], the sector’s long-term trajectory is firmly upward. For investors, the current pullbacks offer a rare opportunity to access high-conviction positions at discounted valuations.

Structural Tailwinds: A New Era of Defense Spending

The 2025 NATO Summit in The Hague marked a paradigm shift. Allies agreed to a binding commitment to allocate 5% of GDP to defense and security by 2035, with 3.5% dedicated to core military capabilities and 1.5% to infrastructure resilience and innovation [2]. This represents a 150% increase from the 2024 average of 2.2% of GDP. Germany, the bloc’s largest economy, has already amended its constitution to lift the debt brake, enabling a defense budget surge to 3.5% of GDP by 2029 [3]. By 2035, this translates to a projected €329 billion annual defense budget—a 230% increase from 2024 levels [1].

The EU’s parallel initiatives, such as the European Defence Fund and the European Peace Facility, further amplify this momentum. In 2024, EU defense spending hit €343 billion, a 19% jump from 2023, with Germany and France accounting for 44% of the bloc’s total [4]. Poland’s aggressive 4.7% GDP target by 2025 underscores the continent’s collective pivot toward self-reliance [5]. These shifts are not cyclical but structural, driven by geopolitical clarity around Russia’s hybrid threats and China’s assertive posturing.

Contrasting Volatility with Resilience: Rheinmetall and Hensoldt

Rheinmetall’s Q2 2025 performance, while slightly below expectations, masks a robust underlying business. Sales of €2.43 billion and an operating profit of €276 million were tempered by delayed German contract awards and civilian business headwinds [6]. However, the company’s €63.2 billion order backlog—a figure expected to double to €120 billion by mid-2026—provides a clear runway for growth [6]. CEO Armin Papperger’s confidence is justified: analysts project a 35% CAGR in EPS from 2026 to 2028, driven by procurement reforms and joint ventures [7].

Hensoldt, meanwhile, has navigated short-term turbulence with resilience. Despite a 64.8% EPS miss in Q2 2025, the company’s stock rose 2.55% pre-market on the strength of a €7 billion order backlog and a 11.3% adjusted EBITDA margin [8]. Its focus on optronics and radar technologies aligns perfectly with NATO’s emphasis on innovation. With a 32.1% earnings growth rate projected for 2025 and a consensus price target of €95.30 (a 2.86% upside from its September 8 closing price), Hensoldt’s valuation remains anchored to long-term demand [9].

Why Pullbacks Are Opportunities

The recent 90% surge in Rheinmetall’s 2025 stock price has led to inevitable corrections, with shares retreating 2.79% in early September [10]. Yet, this volatility underprices the company’s strategic repositioning. The Acceleration Acts, which streamline procurement and open opportunities for SMEs, are set to unlock €158.8 billion in defense spending by 2029 [11]. Similarly, Hensoldt’s stable 30-day trading range (€91.30–€94.20) contrasts with its 32.2% annual EPS growth forecast, suggesting undervaluation relative to its forward-looking metrics [12].

Analysts remain bullish. J.P. Morgan and Morgan Stanley have set €2,250.00 price targets for Rheinmetall, implying a 19.38% upside from its September 4 closing price [13]. For Hensoldt, a 3.5% GDP defense allocation in Germany alone could drive €1.4 billion in annual order intake, reinforcing its premium valuation multiples [14].

Conclusion: Discipline in the Face of Noise

The defense sector’s structural transformation is irreversible. While near-term earnings fluctuations and stock price corrections may test investor patience, they are inconsequential against the backdrop of a €693 billion European defense market in 2024, growing at 17% annually [15]. For Rheinmetall and Hensoldt, the current pullbacks are not warnings but invitations—to invest in companies uniquely positioned to capitalize on a geopolitical reality where security is no longer optional.

Source:
[1] NATO's new spending target: challenges and risks [https://www.sipri.org/commentary/essay/2025/natos-new-spending-target-challenges-and-risks-associated-political-signal]
[2] NATO Summit: Allies Commit to 5% Defence Spending by 2035 [https://www.eid.pt/nato-summit-and-european-council-discuss-defence-investments/]
[3] Debrief: How Germany's Defense Posture Is Transforming [https://aviationweek.com/defense/budget-policy-operations/debrief-how-germanys-defense-posture-transforming]
[4] EU defence in numbers - Consilium.europa.eu [https://www.consilium.europa.eu/en/policies/defence-numbers/]
[5] Sharing the burden: How Poland and Germany are shifting ... [https://www.nato.int/docu/review/articles/2025/04/14/sharing-the-burden-how-poland-and-germany-are-shifting-the-dial-on-european-defence-expenditure/index.html]
[6] German defence group Rheinmetall cites contract delays in ... [https://www.investing.com/news/stock-market-news/rheinmetall-slightly-misses-q2-sales-expectations-but-confirms-target-4175027]
[7] Why European defense stocks should continue to maintain premium valuations [https://www.investing.com/news/stock-market-news/why-european-defense-stocks-should-continue-to-maintain-premium-valuations-3927331]
[8] Earnings call transcript: Hensoldt Q2 2025 misses EPS forecast, stock rises [https://www.investing.com/news/transcripts/earnings-call-transcript-hensoldt-q2-2025-misses-eps-forecast-stock-rises-93CH-4163613]
[9] HENSOLDT AG I (HAG.DU) Q2 FY2025 earnings call transcript [https://finance.yahoo.com/quote/HAG.DU/earnings/HAG.DU-Q2-2025-earnings_call-312027.html]
[10] Rheinmetall AG (RHM.DE) Stock Price, News, Quote & History [https://finance.yahoo.com/quote/RHM.DE/]
[11] Production switch to armaments – what approvals and ... [https://www.taylorwessing.com/en/insights-and-events/insights/2025/09/produktumstellung-auf-ruestungsgueter]
[12] Hensoldt Ag Stock Price Today | ETR: HAGG Live [https://www.investing.com/equities/hensoldt-ag]
[13] Rheinmetall (RHM) Stock Forecast & Price Target [https://www.tipranks.com/stocks/de:rhm/forecast]
[14] Why security is a durable investment theme [https://www.capitalgroup.com/intermediaries/es/en/insights/articles/why-security-is-a-durable-investment-theme.html]
[15] Unprecedented rise in global military expenditure as ... [https://www.sipri.org/media/press-release/2025/unprecedented-rise-global-military-expenditure-european-and-middle-east-spending-surges]