Global Defense Spending Surge: Opportunities in UK and European Aerospace & Defense Stocks

The global defense sector is undergoing a seismic shift, driven by geopolitical tensions, strategic realignments, and unprecedented budgetary commitments. For investors, the UK and European aerospace & defense (A&D) stocks present compelling opportunities, particularly in nuclear submarine modernization, AUKUS alignment, and EU defense reforms. These sectors are not only insulated from macroeconomic volatility but are also poised for sustained growth as nations prioritize security in an increasingly fragmented world.

UK’s Nuclear Submarine Modernization: A £15 Billion Catalyst

The UK’s Strategic Defence Review (SDR) 2025 has cemented nuclear submarine modernization as a cornerstone of national security. The government has committed £15 billion to its sovereign nuclear warhead program and plans to expand its fleet of SSN-AUKUS nuclear-powered attack submarines from seven to 12 by the late 2030s [1]. This expansion is supported by an $8 billion investment in production facilities at BAE Systems (Barrow) and Rolls-Royce (Derby), aiming to achieve a production rate of one submarine every 18 months [3].

BAE Systems, the lead contractor for submarine design and systems integration, has an order backlog exceeding £75 billion and reported a 11% year-on-year sales increase in H1 2025 [2]. Rolls-Royce, meanwhile, secured an $11 billion contract to supply nuclear reactors for the Royal Navy’s fleet, ensuring its dominance in propulsion technology [4]. Analysts at Morningstar estimate BAE’s fair value at GBX 2,250, citing its “wide economic moat” and exposure to long-cycle programs like the SSN-AUKUS [2].

AUKUS Alignment: Strategic Depth and Market Expansion

The AUKUS partnership, though facing U.S. strategic uncertainty, remains a linchpin for UK and Australian defense collaboration. The 50-year treaty between the UK and Australia for joint SSN-AUKUS submarine production underscores this alignment [3]. For UK firms, this partnership opens access to Australia’s $220 billion European defense market by 2030 [1].

However, challenges persist. The U.S. Department of Defense’s ongoing review of AUKUS has raised questions about resource allocation and technological transfer timelines [5]. Despite this, the UK’s “NATO First” approach ensures continued investment in deterrence capabilities, with defense spending targeting 3% of GDP by 2027 [5]. For investors, this duality—strategic risk and growth potential—positions AUKUS-aligned stocks as high-conviction plays.

EU Defense Reforms: A 2 Trillion Euro Boon

The EU’s 2025 defense budget proposal, part of a seven-year, 2 trillion euro plan, marks a paradigm shift. Defense and space funding will receive 131 billion euros—five times current levels—under the European Competitiveness Fund [3]. This aligns with NATO’s 5% GDP defense spending target by 2035 and the EU’s Readiness 2030 package, which streamlines procurement and accelerates investments [4].

Germany’s pledge to double defense spending to €650 billion over five years exemplifies this trend, aiming to create Europe’s strongest military force by 2031 [6]. The European Commission estimates that every euro invested in defense could generate 60-70 cents of GDP, potentially boosting EU GDP by 2-3 percentage points over four years [4]. For companies like Fincantieri and Naval Group, this translates to robust demand for submarine programs. Fincantieri’s Q1 2025 results, for instance, showed a 54% EBITDA surge and a €57.6 billion order backlog [5], while France’s Naval Group continues leading Barracuda-class submarine production [4].

Key Investment Targets: Industrial Giants and High-Margin Segments

1. BAE Systems (UK): With a 13% EBIT growth in H1 2025 and exposure to SSN-AUKUS, Type 26 frigates, and AI-integrated submarine systems, BAE is a prime beneficiary of UK modernization [2].
2. Rolls-Royce (UK): Its nuclear propulsion expertise and $11 billion contract position it as a critical enabler of the UK’s undersea capabilities [4].
3. Fincantieri (Italy): The company’s Underwater segment achieved a 17% EBITDA margin in Q1 2025, reflecting the profitability of submarine technologies [5].
4. Naval Group (France): Leading Barracuda-class submarine production and benefiting from EU/NATO spending hikes, it is a key player in the nuclear submarine market [4].

Conclusion: A Sector Insulated from Downturns

The confluence of nuclear submarine modernization, AUKUS alignment, and EU reforms creates a unique inflection point for UK and European A&D stocks. With defense budgets expanding at a 5.5% CAGR (global nuclear-powered naval vessels market) and companies like BAE and Fincantieri reporting record backlogs, the sector offers both defensive resilience and growth potential. For investors, the imperative is clear: position in firms with technological moats and strategic alignment to these multi-decade trends.

Source:
[1] UK to expand submarine programme in response to Strategic Defence Review [https://www.gov.uk/government/news/uk-to-expand-submarine-programme-in-response-to-strategic-defence-review]
[2] BAE Systems Earnings: Strong Set of Results With Upgraded Guidance [https://global.morningstar.com/en-gb/stocks/bae-systems-earnings-strong-set-results-with-upgraded-guidance]
[3] EU proposes raising defense funding in 2-trillion-euro budget [https://www.cnbc.com/2025/07/16/eu-proposes-2-trillion-euro-seven-year-budget-hiking-defense-spending.html]
[4] UK Agrees $11 Billion Nuclear Submarine Deal With Rolls- ... [https://thedefensepost.com/2025/01/24/uk-rolls-royce-deal/]
[5] Approval of Q1 2025 results [https://www.fincantieri.com/en/media/press-releases/2025/approval-of-q1-2025-results/]
[6] Germany wants to double its defense spending. Where should the money go? [https://www.atlanticcouncil.org/blogs/new-atlanticist/germany-wants-to-double-its-defense-spending-where-should-the-money-go/]