Defense Contractors and NATO Equities: Riding the Wave of Increased Military Spending Post-Trump Shift

The July 2025 meeting between NATO Secretary-General Mark Rutte and U.S. President Donald Trump has sent shockwaves through global defense markets. The talks, framed by Trump's insistence that European allies “pay 100%” for U.S.-supplied weapons bound for Ukraine, mark a pivotal shift in transatlantic burden-sharing. This policy reversal—paired with NATO's newly agreed 5% GDP defense spending target—creates a tailwind for defense contractors and European equities positioned to profit from heightened military collaboration.

The Policy Shift: From U.S. Reluctance to European Burden-Sharing

Trump's abrupt halts to direct U.S. military aid to Ukraine in 2023-2024 were a thorn in NATO's side. However, the 2025 NATO Summit in The Hague flipped the script: European allies now bear the financial burden of U.S.-made weapons, with Trump's administration redirecting focus to leveraging NATO's collective resources. The $35 billion pledged by European and Canadian allies for Ukraine by early 2025 signals a structural shift. U.S. contractors like Raytheon Technologies (RTX)—producer of the Patriot missile system—and Lockheed Martin (LMT), which supplies HIMARS rocket launchers, stand to benefit as European nations procure U.S. hardware to meet their obligations.

Raytheon's stock, up 42% since 2020, reflects investor confidence in its dominance in missile defense systems. The Patriot, a cornerstone of NATO's air defense strategy, is now a linchpin of European burden-sharing deals.

Key Systems in Demand: Patriots, HIMARS, and Cyber Defenses

The Trump-Rutte talks highlight three critical areas of investment opportunity:
1. Air and Missile Defense: Raytheon's Patriot and Northrop Grumman's Aegis systems are critical to NATO's modernization.
2. Precision Strike Capabilities: Lockheed Martin's HIMARS and Boeing's (BA) Apache helicopters remain in high demand as European allies upgrade their arsenals.
3. Cyber and Electronic Warfare: Companies like L3Harris (LHX) and BAE Systems (BAESY) are poised to benefit from NATO's focus on hybrid threats.

European defense giants like Airbus (AIR.PA) and Leonardo (LDO.MI) will also profit from domestic spending hikes. Germany's €100 billion defense fund and France's €10 billion annual increase through 2035 ensure steady demand for European-made tanks, drones, and electronics.

Lockheed's revenue has risen 27% since 2020, driven by HIMARS and F-35 contracts. Its role in NATO's “Patriot for Europe” program—where member states jointly fund U.S. systems—could amplify this trend.

The European Burden-Sharing Playbook

Trump's insistence on European financial responsibility has forced NATO members to rethink procurement strategies. The Netherlands' decision to buy U.S. Patriot batteries under a “shared cost” model sets a precedent for other allies. Rheinmetall (RHM.GR), a German arms manufacturer, is a key beneficiary, as its Boxer armored vehicles and artillery systems align with NATO's interoperability goals. Meanwhile, Saab (SAAB.B) of Sweden and Elbit Systems (ESLT) of Israel are emerging as regional powerhouses in drone and cyber defense tech.

Risks and Considerations

• Geopolitical Volatility: Russia's threat to NATO members within 3–7 years, as outlined in the Summit's threat assessment, could accelerate spending—but also trigger market instability.
• Dependency on Government Contracts: Defense stocks are cyclical and tied to political whims. A Trump policy reversal or a peace deal in Ukraine could halt momentum.
• Supply Chain Strains: European nations' reliance on U.S. components for systems like Patriot may limit their ability to meet production targets.

Investment Strategy: Play Both Sides of the Atlantic

1. U.S. Defense Giants: Buy RTX, LMT, and NOC for their leadership in critical systems. Consider General Dynamics (GD) for its role in armored vehicles and cybersecurity.
2. European Exposure: Add Airbus (defense division) and Leonardo to access Europe's spending boom. ETFs like the iShares MSCI Europe ETF (IEV) offer diversified exposure.
3. Catalysts to Watch: NATO's next summit in 2026 may formalize “shared cost” programs, while Ukraine's 2025 elections could reignite aid debates.

Both stocks rose 15–20% in 2024 amid defense spending pledges, signaling sustained interest in European equities.

Conclusion

The Trump-Rutte meeting has cemented a new era of defense collaboration, where European burden-sharing fuels demand for U.S. and European military tech. While geopolitical risks linger, the structural tailwind of NATO's 5% GDP spending target and Ukraine's ongoing war creates a multiyear opportunity. Investors should prioritize firms with long-term contracts, geographic diversification, and exposure to critical systems like Patriots and HIMARS. This is not just a cyclical rally—it's a strategic realignment of power in the defense sector.

Investment Recommendation: Overweight U.S. defense contractors and European defense equities. Target a 12–18 month holding period, with risk hedged via geopolitical event-driven ETFs.

Data as of July 2025. Past performance does not guarantee future results.