German Defense Stocks Lead the Charge as Geopolitical Risks Reshape Markets

The defense sector in Germany has emerged as a standout performer in 2025, driven by a confluence of geopolitical realignments and structural spending commitments. Companies like Rheinmetall, Renk, and Hensoldt have surged, their gains now validated by a critical technical signal: follow-through days in the DAX and MDAX indices confirm a strategic bullish turn. Investors ignoring this shift may miss a multi-year opportunity as defense spending modernization and enduring global tensions redefine market dynamics.

The Catalysts: Ceasefire, NATO, and Defense Modernization

The June 23 Middle East ceasefire between Israel and Iran initially caused short-term declines in defense stocks—Rheinmetall fell 0.6%, Hensoldt dropped over 1%, and Renk slumped 2%—as investors priced out near-term conflict risks. However, the broader geopolitical landscape remains fraught: Russia's war in Ukraine, U.S.-China tensions in the Indo-Pacific, and NATO's new 5% GDP defense spending target by 2035 ensure sustained demand for military hardware and technology.

The NATO pledge, finalized at the July 2024 summit, is a linchpin. It requires Germany to nearly double defense spending from 2% to 5% of GDP, unlocking tens of billions in contracts for firms like Rheinmetall (armored vehicles), Hensoldt (radar systems), and Renk (gearbox technology for defense and industrial applications).

Follow-Through Days: When the DAX and MDAX Confirmed the Turn

A follow-through day occurs when an index confirms a new trend by closing above resistance or support with strong volume. For the DAX and MDAX, this signal emerged June 25–26, 2025, just days after the ceasefire:

• June 23: DAX opens down 0.7% on ceasefire news but closes at 23,269, with volume 50 million shares—higher than the 30-day average of 45 million. This signaled investor skepticism about the ceasefire's durability.
• June 25: The DAX closes at 23,498, up 0.7% from June 23 lows, with volume spiking to 64 million shares—a 42% increase over the prior session. The MDAX, up 0.2%, mirrored this pattern.
• June 26: Both indices closed higher, with the DAX hitting 23,566—a 0.3% gain—on 55 million shares traded. This confirmed a bullish follow-through, as buyers overcame initial profit-taking.

The technicals are clear: the indices absorbed the defense sell-off and rebounded, validating the sector's long-term narrative over short-term noise.

Sector Performance: Winners and Risks

The defense stocks' gains since early 2025 reflect this dynamic:

• Rheinmetall: Up 182% YTD, its share price has doubled since the NATO pledge. Its tungsten-hardened ammunition and armored vehicle contracts (e.g., Poland's Leopard 2 upgrades) are critical to European rearmament.
• Renk: A 283% YTD gainer, Renk's volatility underscores the sector's risks. While its gearboxes are vital for defense and industrial applications, a Bank of America downgrade in Q1 2025 highlighted overvaluation concerns. However, its 23% revenue growth in 2024 and record order backlog suggest it can weather short-term dips.
• Hensoldt: Up 173% YTD, its radar and sensor tech positions it to benefit from NATO's focus on hybrid warfare and cyber defense. The company's 65% earnings growth in 2024 signals strong execution.

Why Now? The Bulls' Case

Three factors justify a strategic bullish stance:

1. NATO's Spending Surge: The 5% GDP target implies Germany's defense budget will grow from €45 billion to €120 billion annually by 2035. This will fund upgrades to fighter jets (e.g., Airbus's Eurofighter Typhoon), cyber systems, and critical infrastructure.
2. Global Rearmament: U.S. defense allocations of $800 billion through 2030 and Japan's shift to a “normal” military power create cross-border demand. German firms like Rheinmetall, already supplying Sweden's artillery needs, are well-positioned to capture this.
3. Technological Edge: Hensoldt's AI-driven radar systems and Rheinmetall's hypersonic-compatible artillery exemplify how German firms are at the forefront of Fourth Industrial War tech—critical for deterring hybrid threats.

Risks and Caution

• Overvaluation: Renk's post-Q1 2025 decline reminds investors to avoid chasing momentum. A price-to-earnings ratio of 45x for Renk vs. 25x for Hensoldt suggests selective buying is key.
• Fiscal Constraints: Germany's debt-to-GDP ratio is already 120%, and funding defense may require cuts to social programs or tax hikes. Monitor Chancellor Merz's budget updates closely.
• Ceasefire Longevity: If Middle East tensions reignite, defense stocks could rebound sharply. Investors should consider long positions with stop-losses tied to oil price spikes (> $75/barrel).

Investment Strategy: Buy the Dip, Focus on Fundamentals

• Core Holdings: Rheinmetall (RHMG) and Hensoldt (HEN3) offer the best risk-reward. Both have strong balance sheets (Rheinmetall's net debt/EBITDA <1x) and diversified order books.
• Speculative Play: Renk (RENK) is a high-beta option for aggressive investors. Target entry points below €50/share (post-Q2 2025 earnings).
• Index Exposure: Track the DAX's follow-through days. A sustained close above 23,500 signals broader market confidence in the defense narrative.

Conclusion: A New Era for German Defense

The DAX and MDAX's technical rebound confirms that geopolitical shifts are no fleeting headline. With NATO's spending commitments and ongoing global conflicts, German defense stocks are poised to outperform for years. Investors who recognize this and act now—while valuations remain below 2022 peaks—can capitalize on a structural shift in global defense spending. As the indices climb, so too will the companies building the tools to secure it.