Investors are buying into a “megatrend” in European defense spending that is expected to continue over the next decade, fueled by a combination of EU, state and private capital funding. With some of Europe’s leading defense stocks soaring to returns of nearly 20% in the first week of 2026, investors now see the sector as a long-term bet, shaped by both current tensions over Venezuela and Greenland and long-term concerns about the continent’s defense capabilities and the future of NATO. Rafael Tuin, head of capital markets strategy at Tikehau Capital, said multiple factors, including the continued threat from Russia and the end of the U.S. defense umbrella in Europe, are supporting what he calls “the megatrends that are forming.” Tuyn said Europe’s security was “depleted” after decades of underinvestment and now needed urgent action. “Regardless of Ukraine, regardless of the peace plan, which we obviously hope will be signed soon, this trend should go further. Given the potential threat that Russia represents to Russia and European countries, that is not going to go away,” Tuyn said on CNBC’s “Early Edition of Europe” last week. He added that the end of the US defense “umbrella” over Europe is a central pillar of the investment thesis. “Whatever government comes next, it will certainly not replace European security,” he added. RHM-DE YTD Mountain Line Metal. Defense stocks soar The geopolitical turmoil that underpinned the first week of 2026 has put the world’s defense capabilities in the spotlight. After U.S. forces overthrew Venezuelan President Nicolas Maduro on January 3, tensions over Greenland reignited, raising the possibility of a rift within NATO. President Donald Trump has claimed that the United States “needs” Greenland for “national security,” raising questions about the future of the Transatlantic Alliance and putting Europe’s long-term defense capabilities under new scrutiny. Separately, France and Britain last week signed a letter of intent to send troops to Ukraine if a peace deal is reached. Aneeka Gupta, director of macroeconomic research at WisdomTree, said stalled peace efforts in Ukraine, tensions in Greenland and the Venezuela operation will all provide new catalysts for defense in 2026, following a record year in 2025.[They] “It justifies Europe’s decision to lock in much larger spending, concentrate critical capabilities locally, and strengthen its multitrillion-dollar rearmament pipeline,” Mr. Gupta said in the memo. German defense giant Rheinmetall is up 22.8% since the beginning of the year, while Italian peer Leonardo is up 19.7%. Tank parts maker Lenk rose 23.1%, while radar and surveillance specialist Hensoldt rose 25.6%. Although the Swedish fighter jet maker has returned 29.9% year-to-date and is up 56.5% in 2025, European defense stocks still trade at a discount compared to more than 30 times earnings in the U.S. “The margin for error is limited and this may be part of the risk of investing in defense stocks,” he said. “Right now there’s some differentiation between stocks, but if you look out two, three or five years, they’re no longer that expensive.” Investors point to spending commitments at both national and European Union levels, including the €800 billion ($841 billion) European Rearmament Initiative and greater political support for mobilizing private capital. “In our view, regardless of short-term fluctuations, defense companies are supported by the EU and NATO’s long-term military spending plans,” Helen Jewell, international chief investment officer at BlackRock Fundamental Equities, said of the stock market outlook. YTD Mountain Leonard added. Ensure that private capital is also invested in this area. European savings can also finance this effort towards strengthening resilience and sovereignty in defense and other areas. Fawaz Chaudhry, chief investment officer at Fulcrum Asset Management, told CNBC’s “Europe Early Edition” on January 5 that the “hard power” shown by the United States in Venezuela on Saturday was a “signaling exercise” that would trigger “further military spending and further rearmament in Europe and Asia.” He said European defense stocks stood to benefit from both greater regional sovereignty and military spending within the region, as well as increased demand from outside the continent, where these companies are major exporters. “This arms race could come from both Europe and outside Europe,” he said. “This is related to budgetary tailwinds from multiple sectors and a growing premium for Europe’s strategic autonomy over the politically unstable US security umbrella,” said Gupta. Tuin said Tikehau itself is already “very invested” in this trend, with $3 billion in assets allocated to defense and cybersecurity. He acknowledged defense stocks in late 2025 and the potential for near-term instability if a permanent peace deal is reached in Ukraine. “Currently, many European military equipment manufacturers are mainly focused on supplying equipment such as tanks, armored vehicles and ammunition to Ukraine,” he said, “but soon after that we will have to rebuild our military capabilities in Europe.” There is a wide variety of equipment to deal with, including missiles, air defense systems, fighter jets, and warships. ”
