European Defence Stocks Rally: Geopolitical Tensions Driving Market Momentum
By Fernando Iannetta
The international market landscape in 2025 has been defined by uncertainties and challenges. Trade disputes have threatened globalization, and the most significant military alliance in history could lose support from the world’s most dominant economic force. While these geopolitical tensions have weighed heavily on many regions, they have driven strong growth in others. This article explores these shifting market dynamics, focusing on one sector at the forefront of it all.
Evolving Market Outlook in 2025
In recent years, the market has been dominated by U.S. equities, particularly within the technology sector. With the help of the “Magnificent Seven” stocks, the S&P 500 recorded a price return of over 50% from the beginning of 2023 to the end of 2024, and the NASDAQ rose around 85%. In comparison, the TSX rose by 26%, and Europe’s benchmark index, the STOXX 600, saw an increase of 17% during the same period.
This year, the U.S. market has reflected the chaotic international landscape, as companies scramble to offset the impact of tariffs and navigate supply chain issues. As of March 7, the S&P 500 is down 1.89% year-to-date, with the decline approaching 4.5% compared to its value on January 20 - Inauguration Day. Additionally, the U.S. 10-year treasury yield dropped below 4.2% for the first time since December (CNBC, 2025), and the price of gold has increased eight weeks straight to start the year. These are both indicators of market uncertainty, with investors looking to put their money into safer assets. On our side of the border, results are not much better. The TSX Composite is also down, and the implementation of tariffs by the U.S. has added to many existing challenges, putting the future of our economy into question.
While the relationship between the U.S. and Europe has been turbulent in 2025 due to security and trade concerns, market performance has been vastly different for each. The STOXX 600 is up around 10% year-to-date, France’s benchmark index, the CAC 40, is also up 10%, and Italy’s FTSE MIB is up nearly 13%. Germany, the EU’s leading economic contributor, has seen the largest gains. After a recent election, the country’s incoming chancellor vowed to create a $500 billion infrastructure fund and overhaul existing borrowing rules, to revive growth in the economy and limit reliance on the U.S. (Merz, 2025). These announcements, along with some other developments to be discussed, have contributed to Germany’s DAX index surging 15% year-to-date.
Reshaping Transatlantic Relations
After a heated exchange in Washington on February 28 between President Trump and President Zelenskyy, the U.S. suspended all military aid to Ukraine (The New York Times, 2025). This caused considerable concern within the European Union, which relies heavily on the U.S. They are the largest and most powerful military in NATO, contributing to two-thirds of the alliance’s defence spending (BBC, 2025). The EU had to move fast. On March 4, Ursula von der Leyen, president of the EU’s political executive arm - the European Commission, announced a plan to ‘rearm’ Europe. She announced they would be expanding space for military investment in member states, as well as providing EUR 150 billion in loans. In all, the plan could mobilize close to EUR 800 billion in defence spending (The Guardian, 2025).
Now, certain companies involved in defence manufacturing and security have seen their stock prices climb as investors bet on long-term increases in government contracts.
Top Performers: Companies Cashing In on Europe’s Defence Push
The Select STOXX Europe Aerospace & Defence ETF (BATS: EUAD) has increased around 35% year-to-date and is a good indicator of the performance of the European defence sector as a whole. Its holdings include the following companies, which have led the gains.
Leonardo SpA (BIT: LDO): Leonardo is an industrial group based in Italy that builds technological capabilities in aerospace, defence electronics, cybersecurity, and more. They recently announced a partnership with Turkish drone manufacturer Baykar to enhance their aerial warfare capabilities.
As of March 7, their stock price has increased 65.77% year-to-date.
Thales SA (EPA: HO): Thales is a French technology group that invests in digital innovations; including artificial intelligence, cybersecurity, and quantum technology to design, develop, and manufacture military systems and equipment.
As of March 7, their stock price has increased 72.02% year-to-date.
Rheinmetall AG (ETR: RHM): Rheinmetall is a leading international defence technology company with five main divisions: Vehicle Systems (Europe), Vehicle Systems (International), Weapon and Ammunition, Electronic Solutions, and Power Systems.
As of March 7, their stock price has increased 84.60% year-to-date.
These companies have certainly been amongst the top beneficiaries of the defence spending plan. They have helped boost their nations’ markets higher, at a time when the broader economic landscape has been unsteady. As Europe accelerates its military investments, these industry giants are positioning themselves as key players in the continent’s long-term security strategy. This raises the question - how long will these gains last? Are these companies being significantly overvalued, or will they be able to maintain their growth?
More importantly, what does the future of NATO look like after this defining moment in history?
Such an insightful and well written article on a very important topic