European Defense Sector Growth: Strategic Procurement and Aerospace Equity Valuations in 2025

The European defense sector is undergoing a transformative phase, driven by sweeping policy reforms and a surge in strategic procurement. As geopolitical tensions persist and the continent prioritizes self-reliance, aerospace equity valuations are being reshaped by a confluence of fiscal stimulus, cross-border collaboration, and industrial retooling. This analysis examines the interplay between defense procurement and equity performance, using granular data from 2025 to underscore the sector's long-term investment potential.

Policy Catalysts: ReArm EU and the Fiscal Re-rating

The European Commission's ReArm EU initiative, announced in March 2025, has become the cornerstone of the continent's defense renaissance. By mobilizing €800 billion over a decade—including a €150 billion loans-for-arms fund—the program aims to accelerate investments in air and missile defense, drones, and cyber capabilitiesEurope Rearms: What Defense Spending Means for Markets^[1]. This initiative also exempts defense spending from deficit limits, unlocking an additional €650 billion in national budgets over four yearsEurope Rearms: What Defense Spending Means for Markets^[1]. Germany's €500 billion multi-year defense and infrastructure package, coupled with its commitment to raise defense spending to 5% of GDP, further amplifies this momentumEurope Rearms: What Defense Spending Means for Markets^[1].

The fiscal flexibility afforded by ReArm EU has already triggered a re-rating of European defense stocks. The MSCI European Aerospace and Defense Index now trades at a 13% discount to its U.S. counterpart, reflecting undervalued growth potentialInvestors see European stocks as compelling in bid to diversify^[2]. Meanwhile, the STOXX 600 Aerospace & Defense Index surged 62% year-to-date in 2025, outpacing broader European marketsThe Top European Defense Stocks for 2025^[3]. This outperformance is underpinned by robust order backlogs and improved investor sentiment, as companies like Rheinmetall and Thales report double-digit sales growthThe Top European Defense Stocks for 2025^[3].

Strategic Procurement: From Contracts to Capabilities

The European Defence Agency (EDA) has been instrumental in translating policy into action. In 2025, it launched initiatives such as EDA/2025/OP/0009 (Strategic Analysis of Defense Technology) and EDA/2025/OP/0006 (HUB for EU Defence Innovation), emphasizing innovation and operational readinessProcurement^[4]. These contracts, alongside the European Defence Industry Reinforcement through Common Procurement (EDIRPA) program, have allocated €300 million to fund five cross-border projects, including the procurement of MISTRAL 3 and IRIS-T SLM air defense systemsEU boosts defence readiness with first ever financial support for common defence procurement^[5].

The MISTRAL 3 project, involving nine EU member states, is a case study in collaborative procurement. With a €60 million EU contribution, it aims to procure 1,500 short-range missiles, leveraging economies of scale to reduce costsEU boosts defence readiness with first ever financial support for common defence procurement^[5]. Similarly, the Common Armoured Vehicle System (CAVS) project, involving Germany, Finland, and others, underscores the shift toward joint production and shared R&D burdensEU boosts defence readiness with first ever financial support for common defence procurement^[5]. These contracts are not merely fiscal exercises; they are strategic tools to consolidate Europe's defense industrial base while ensuring compliance with the European Defense Industrial Strategy (EDIS), which targets 50% domestic sourcing of equipment by 2030How Industrial Companies Can Win Defense Contracts^[6].

Equity Performance: Financials Reflect Procurement Momentum

The financial results of key aerospace and defense firms in Q2 2025 validate the sector's strength. Airbus Defence and Space reported a 22% revenue increase in Q2, driven by cybersecurity contracts and military aviation demandAirbus Defence and Space Posts 17% Growth in H1 2025^[7]. Its H1 2025 revenue reached €5.8 billion, with an adjusted EBIT of €185 millionAirbus Defence and Space Posts 17% Growth in H1 2025^[7]. Thales, which derives 50% of its revenue from defense, posted €5.31 billion in Q2 sales and raised its full-year guidance due to strong defense ordersThales Raises 2025 Revenue Outlook on Defense Strength^[8]. Its EBIT margin of 12.2% in H1 2025 outperformed expectationsThales Raises 2025 Revenue Outlook on Defense Strength^[8].

Rheinmetall exemplifies the sector's resilience, with defense segment sales rising 36% in H1 2025 to €4.7 billion and an operating margin of 12.4%Financial report for the first half of 2025 | Rheinmetall^[9]. The company's €63 billion order backlog, fueled by contracts for armored vehicles and ammunition, highlights the durability of demandFinancial report for the first half of 2025 | Rheinmetall^[9]. These financial metrics align with broader trends: European defense firms now hold order books exceeding €200 billion collectively, with EBITDA margins expanding to 16.4× in Q2 2025Aerospace & Government | Q2 2025 | PCE Investment^[10].

Valuation Implications and Future Outlook

The interplay between procurement and valuations is evident in the sector's multiples. European defense stocks trade at a premium to their U.S. peers, with the STOXX 600 Aerospace & Defense Index's TEV/EBITDA multiple reaching 16.4× in Q2 2025Aerospace & Government | Q2 2025 | PCE Investment^[10]. This premium reflects both the sector's defensive characteristics and its exposure to secular growth drivers, such as NATO's June 2025 summit commitments to raise defense spending to 5% of GDPNATO’s 2025 summit set to impact European defence stocks^[11].

Looking ahead, the Security Action for Europe (SAFE) program—offering €127 billion in low-cost loans—will further catalyze procurement. While non-EU firms can participate in up to 35% of projects, the emphasis on European content ensures that domestic primes like Airbus, Leonardo, and Safran will dominateEU Defense Spending Boost Potential Boon for U.S. Companies^[12]. Investors should also monitor the UK-EU post-Brexit security agreement, which has opened access to the €150 billion EU defense fund for UK-based firms like BAE SystemsMeet the defense giants that will rearm Europe as EU^[13].

Conclusion

The European defense sector's growth is no longer speculative—it is being driven by concrete policy frameworks, cross-border procurement, and robust financial performance. For investors, the alignment of geopolitical necessity, fiscal stimulus, and industrial capability creates a compelling case for long-term exposure. As the continent rearms, aerospace equities stand to benefit from a structural re-rating that mirrors the scale of its ambitions.