Geopolitical shocks drive a global boom in defense stocks – is this lasting?

Investors Rewrite the Defense Sector Game

The beginning of 2026 changed the dynamics of financial markets worldwide. Geopolitical drama – from escalation of the conflict in Ukraine, through unpredictable moves by the US administration towards Greenland, to allies’ concerns – led to a massive influx of capital into defense companies. This wave of investment is not a coincidence but a logical consequence of uncertainty, which forces countries to prioritize spending on national security and modernization of their defense capabilities.

Change in rhetoric, change in markets

Former President Donald Trump’s proposal for the United States to increase its defense budget by 500 billion dollars immediately sent a signal to global markets. But it’s not only political decisions in Washington that are fueling investor appetite. The conflict in Ukraine, which intensified in January with a new wave of hostilities, suggests that the world will have to live under long-term instability conditions.

Anika Gupta from WisdomTree summarized the scale of the change: “This is a clear reminder that the US, a key ally, cannot always be relied upon. Not only should efforts to rearm be increased, but the pace of these initiatives should also be accelerated.”

Europe Awakens from Sleep

For European defense companies, this year looks like a natural continuation of the impressive 2025, when stocks rose by 90%. This time, the impulse comes from within – European governments, frightened by the prospect of a less reliable US ally, are seriously considering autonomy in defense.

Goldman Sachs observed sharp increases in European defense contractor stocks in January, with experts prioritizing companies that can quickly respond to rising government demand. Morningstar analysts estimate that European defense stocks could increase by an average of 20% over the year – provided macroeconomic conditions remain stable and US spending supports exports.

Germany’s Rheinmetall AG is currently the brightest star in the firmament – a 150% increase last year extended into January. Vera Diehl from Union Investment Privatfonds GmbH also points to Saab AB and Kongsberg Gruppen ASA as beneficiaries of the situation, especially due to their geographical proximity to areas of interest for Trump. The rhetoric surrounding Greenland could also accelerate Europe’s plans toward greater self-sufficiency – which means billions in new orders for arms manufacturers.

Asia Not Falling Behind

At the same time, Asia is awakening to its potential. Hanwha Aerospace Co. from South Korea increased nearly 30% this month, after a sensational 200% rise last year. Hyundai Rotem gained 16%, while Aerospace Industrial Development Corp. from Taiwan and Howa Machinery Ltd. from Japan are also posting solid results.

Weiheng Chen from JPMorgan Private Bank sees particularly high potential among Korean suppliers: “We are optimistic about large arms producers, especially in South Korea, who are expanding exports and international sales to capitalize on growing global defense expenditures.”.

Cha So-Yoon from Taurus Asset Management expects Hanwha Aerospace and Hyundai Rotem to secure significant export contracts this year with countries such as Iraq and Saudi Arabia. The export weapons market in the Middle East acts like a turbine driving the growth of Asian manufacturers.

Some IPO Actions on the Horizon

The positive trend on the stock markets is prompting major players to enter the capital market. Czechoslovak Group AS, a Czech armored vehicle manufacturer owned by Michal Strnad, is reportedly considering an IPO in Amsterdam within a few weeks. This signals that the sector is attracting not only existing investments but also new capital.

US Stocks: Less Enthusiasm, Greater Concerns

While the US defense contractor index gained 30% last year, early 2026 has brought a somewhat cooler atmosphere. Trump proposed restrictions on share buyback and dividend programs for defense companies, which somewhat tempered investor enthusiasm.

Paradoxically, this could be good news for European rivals. Alessandro Pozzi from Mediobanca notes that capital return limits could change the investment calculus: companies like BAE Systems Plc and Leonardo SpA, with significant exposure to US orders, may become relatively more attractive to capital that avoids US stocks.

Main Risk: Overly Rapid Valuation Escalation

Despite optimism, the sector is not without risks. A diplomatic breakthrough in Ukraine could weaken the rally. Additionally, the recent rally has pushed European defense company valuations to historically high levels. In the second half of last year, growth slowed as investors waited for evidence that increased government spending translated into real profits.

Fabien Benchetrit from BNP Paribas maintains a long-term perspective: “The sector’s long-term prospects remain solid as long as states prioritize autonomy and modernization of their defense capabilities.”.

Michael Hartnett from Bank of America summarized a conversation with a London-based client who called the defense sector “the most convincing long-term investment theme in the world” – a view that, for now, the market strongly shares.