Key Takeaways
- European defense stocks have lost favor in 2026 following a record run on bumper military spending commitments.
- Market sentiment could turn positive later in the year, before meaningfully picking up in 2027, analysts say.
- Yet they urge selectivity, with Rheinmetall, BAE and Leonardo among preferred picks at current valuations.
Following broad declines this year, Europe’s defense stocks offer an attractive entry point at current valuations, according to analysts—but a convincing rebound may not come before the end of the year.
The region’s weapons makers have struggled to recover the momentum of recent years so far in 2026 amid intensifying investor scrutiny. German sector favorites such as Rheinmetall RHM and Renk RENK have now shed as much as 50% from their 2025 peaks, while Italy’s Leonardo LDO, France’s Thales HO and Britain’s BAE BAE are all around 20% lower, even as European capitals double down on their defense spending commitments.
Nato’s annual summit earlier this month did little to up the ante. Despite fresh procurement plans and spending pledges for Ukraine, a short-term uplift failed to sustain. Nevertheless, Raphael Thuin, head of capital market strategies at Tikehau Capital, says defense remains a “strong area of conviction,” currently with a “very good entry point.”
“Valuations have come down. But we haven’t seen an inflection when it comes to their fundamental trajectory at all. It’s kind of the contrary. For many of them, it is an acceleration still. Demand is plentiful. They are more dealing with execution issues,” he says.
Europe’s defense stocks received a multi-year boost after the war in Ukraine prompted bumper military investments aimed at countering decades of underspending, waning US support and a rising risk of war. Shares of defense majors BAE and Thales gained nearly 200% from the outbreak of the Ukraine war in Feb. 2022 to late 2025, while Leonardo surged 630% and Rheinmetall skyrocketed by a whopping 1,400%.
Political Spending Promises Aren’t Enough
“The defense spending story has shed its cyclical character entirely; this is now a structural, multi-decade commitment,” says Katy Stoves, investment manager at Mattioli Woods.
Yet, much of those fiscal commitments have yet to translate into orders, weighing on share prices in 2026. Where they have, questions remain over firms’ ability to convert those orders into deliveries, leaving the market mostly unimpressed following firms’ recent earnings reports.
“Procurement has been slower than expected to convert into firm orders,” Morningstar equity analyst Loredana Muharremi says. “That has weighed on cash flow, margins in some cases, and investor confidence.”
The Defense Tide May Not Lift All Boats
The recently postponed IPO of German-French defense company KNDS exemplifies market jitters. The maker of Leopard 2 battle tanks had been planning to list in Frankfurt and Paris this summer, but shareholders this month elected to delay the listing until market sentiment improves.
Tikehau’s Thuin said the move demonstrates current skepticism around the theme, noting that the “rising defense tide may not lift all boats.” Instead, he urged selectivity: “Some of those defense companies will manage to be the next winners. Some defense companies will do a good job at consolidating the industry. But we believe it’s a very good entry point now to redeploy in defense.”
Morningstar’s Muharremi cites Germany’s Rheinmetall as her top pick, due to structural demand, market positioning, and future earnings quality. Other preferred stocks at current valuations include BAE and Leonardo, which she says both offer exposure to key themes in Europe’s rearmament cycle, namely air defense and electronics.
Meanwhile, Mattioli Woods’ Stoves notes that defense companies able to incorporate and capitalize on AI could be future frontrunners. Fresh funding for German defense upstart Helsing’s AI and autonomous military software recently cemented its position as one of Europe’s most valuable start-ups, adding credence to a growing group of unlisted defense AI firms including Quantum Systems and Stark.
“The more interesting question for investors is compositional: Where is the money going? Increasingly the answer is artificial intelligence,” says Stove. “The convergence of defense procurement and AI investment offers a distinct and durable opportunity set for those willing to look beyond the traditional primes.”
As for the broader valuation of defense stocks, Muharremi says sentiment should turn in the coming quarters, as investors see production climb and convert into earnings.
“We think sentiment should become more constructive toward the end of 2026, with a more meaningful acceleration in 2027,” says Muharremi. “By then, we expect procurement to accelerate, particularly in Germany, with framework agreements increasingly converting into firm contracts, while much of the capacity built over the past few years comes online.”
“As production ramps and fixed costs are absorbed across higher volumes, revenue growth, margins and cash generation should improve,” she adds.
