European defense stocks rose on Jan. 8 after President Donald Trump called for a roughly 66% increase in the 2027 US defense budget, alongside renewed geopolitical risk from Washington’s rhetoric on Greenland.
Why it matters: While major US defense primes would capture most of the upside, a larger defense budget should also favor smaller contractors and European primes with US operations, reflecting the Defense Department’s push to reduce reliance on the top five and diversify the industrial base.
- The call for a higher US defense budget signals persistently elevated geopolitical risk, reinforcing the defense supercycle. While US primes are the primary beneficiaries if approved, we expect European primes with direct US exposure and production capacity to also see incremental upside.
- On the other hand, the White House has not excluded military options for Greenland. Even if this remains negotiation rhetoric, it raises tensions and could accelerate European defense integration, joint procurement, and a shift toward Continental industrial self-reliance.
The bottom line: We maintain our fair value estimates across our European defense coverage. If the US budget increase is approved, it would reinforce the defense supercycle and offer incremental midterm upside for European primes with direct US exposure and production capacity.
- We favor BAE, Leonardo, and Rheinmetall, as today’s gaps are in air defense, missiles, and ammunition. BAE is embedded in US air and land platforms, electronic warfare, and space, and Leonardo via DRS in sensors and C4ISR (battle management). Rheinmetall is best placed for ammunition and land systems capacity expansion.
- We view the Greenland narrative as political posturing rather than a credible policy. Europe’s optimal response is unity and coordination, raising escalation costs, and reinforcing internal checks in the US. The rhetoric supports our midterm view of faster equipment spending amid rising geopolitical tensions.
