The Strategic Re-rating of European Defence Stocks Amid U.S. Geopolitical Signals

The 2024 U.S. presidential election has catalyzed a seismic shift in the European defense sector, driven by divergent U.S. geopolitical signals and a recalibration of transatlantic security dynamics. As Donald Trump's re-election campaign intensified pressure on NATO allies to shoulder greater defense responsibilities, European nations accelerated their pivot toward strategic autonomy. This has triggered a re-rating of European defense stocks, with the sector outperforming global benchmarks and embedding a significant geopolitical risk premium into valuations.

U.S. Geopolitical Signals: Divergent Paths, Convergent Pressures

The U.S. election outcome has created two distinct scenarios for European defense dynamics. A Trump administration, as outlined in analyses from the Center for Strategic and International Studies (CSIS) and the Financial Times, would likely adopt a transactional approach to NATO, urging European allies to cover conventional military costs while retaining the U.S. nuclear umbrella After the Ballots: What the U.S. Elections Mean for NATO^[1]. This "dormant NATO" framework would reduce U.S. troop presence in Europe and diminish intelligence-sharing, forcing European nations to accelerate defense integration and capability development How the US election outcome will influence Europe’s …^[2]. Conversely, a Kamala Harris administration would maintain Biden-era support for NATO and Ukraine but with a gradual shift in U.S. strategic focus toward the Indo-Pacific Consequences of the US 2024 Elections for European …^[3].

Regardless of the outcome, the U.S. has signaled a long-term commitment to a defense budget exceeding $1 trillion, with Republicans advocating for aggressive modernization and Democrats prioritizing fiscal restraint Trump And Haley’s Election Battle Forecasts Defense Industry Trends^[4]. This duality has created a "geopolitical risk premium" in European defense stocks, as investors hedge against both U.S. disengagement and sustained transatlantic cooperation.

Sectoral Momentum: Defense Stocks Outperform Amid Spending Surge

European defense stocks have surged in 2025, with ETFs like the Themes Transatlantic Defense ETF (NATO) up 35% and the iShares European Defense ETF (EUAD) gaining 70% year-to-date NATO, European Defense ETFs: 2025 Market Leaders^[5]. This outperformance is underpinned by a 17% increase in European military spending to $693 billion in 2024, reversing decades of post-Cold War budget reductions European Defense Sector Outlook 2025: Post-Putin …^[6]. Germany's $110 billion 2025 defense budget—making it the world's fourth-largest spender—and Poland's push for NATO to meet the 3% GDP target exemplify this shift The Future of European Defense - Goldman Sachs^[7].

Key players like Airbus, BAE Systems, and Rheinmetall have capitalized on this momentum, with Airbus securing record orders for military aviation and BAE Systems expanding into cyber defense The Top European Defense Stocks for 2025^[8]. The STOXX Aerospace & Defense index has more than doubled since the Russian invasion of Ukraine, reflecting a structural re-rating rather than cyclical demand European Defense Sector Remains Resilient through 2025^[9].

Geopolitical Risk Premium: Pricing in Uncertainty

The embedded geopolitical risk premium in European defense stocks is evident in their valuation multiples. As of mid-2025, European defense equities trade at 30x forward earnings, significantly higher than the broader STOXX index European defence sector could be peaking - FT Adviser^[10]. This premium reflects investor anticipation of prolonged geopolitical tensions, including the Russia-Ukraine war, U.S.-China competition, and potential U.S. tariff reimposition on EU steel and aluminum US election: its impact on Europe - Economist …^[11].

Morningstar analysts note that 81.4% of defense companies experienced stock movements tied to the Russia-Ukraine conflict, with European and U.S. firms showing the strongest reactions Investigating the effect of geopolitical risk on defense companies ...^[12]. The European Commission's "Re-arm Europe" initiative, including a €800 billion joint debt program, further underscores the sector's strategic importance Rethinking European defence: Market dy…^[13].

Sectoral Momentum vs. Broader Markets

European defense stocks have decisively outperformed broader indices. The Select STOXX Europe Aerospace & Defense ETF (EUAD) surged 39% year-to-date, compared to the S&P 500's 2% gain and the iShares U.S. Aerospace & Defense ETF's 5.4% increase 2025 Puts European & Global Defense ETFs on the Map^[14]. This divergence is driven by Europe's unique exposure to geopolitical volatility and its fragmented defense industrial base, which now faces urgent modernization needs.

However, analysts caution that stretched valuations and fiscal constraints could moderate future growth. While political will supports defense spending, limited use of the EU's national escape clause (NEC) and budgetary pressures in countries like Spain may temper the pace of rearmament European Defense Sector Outlook 2025: Post-Putin …^[15].

Conclusion: A Strategic Re-rating Amid Uncertainty

The re-rating of European defense stocks reflects a recalibration of risk and reward in a post-Putin, post-Trump world. As NATO allies commit to 5% GDP defense spending by 2035 and U.S. policy shifts create both opportunities and uncertainties, the sector remains a critical hedge against geopolitical instability. For investors, the challenge lies in balancing optimism about long-term growth with caution regarding valuation extremes and fiscal realities.