Europe is remilitarizing faster than at any point since the 1980s, and the numbers are staggering.

This isn't a temporary spike. It's a structural shift driven by Russia's war in Ukraine, Trump's renewed demands for European burden-sharing, and a fundamental realization that the post-Cold War "peace dividend" is over. NATO agreed in June 2025 to a new spending target of 5% of GDP by 2035, broken into 3.5% for core defense and 1.5% for infrastructure, cyber, and resilience. That's more than double the current 2% target that took Europe a decade to finally meet.

For investors, this creates a multi-year tailwind for European defense companies, and the opportunity is massive. But you need to understand what's happening, which companies win, and how to actually access this theme without getting burned by valuation.

And if you do decide to invest in this area specifically, you need to make clear to yourself that you are not seeking to profit from warfare. The important distinction is that you are investing in the defense of the European continent and the reality that Europe has no choice but to increase it’s defense budgets to fill the void that was previously filled by the US for decades. You need to make these distinctions and decide what you are willing to invest in, whether it be weapons, tobacco, gambling, alcohol, or anything else you have a problem with profiting from in your gut. At the same time be aware, that if you hold an S&P 500 fund, or most large core index funds, you are investing in several such companies already.

Let me give you the progression because it shows how dramatic this shift is.

In 2014, when NATO established the 2% of GDP spending target after Russia annexed Crimea, only three allies met it.

In 2022, when Russia invaded Ukraine, seven countries hit the mark. In 2024, a total of 18 NATO members cleared the threshold.

And in 2025? All 32 NATO allies are expected to meet or exceed 2% for the first time ever.

Poland leads the pack at 4.5% of GDP, followed by Lithuania (4.0%), Latvia (3.7%), and Estonia (3.4%). These frontline states bordering Russia aren't playing around and have begun to take the threat of invasion seriously. Poland's defense budget hit €34 billion in 2024 and they're targeting 4.7% in 2025. These are basically wartime spending levels during peacetime.

Germany, historically reluctant to boost military spending due to post-WWII sensitivities, is undergoing a complete transformation. The country spent €90.6 billion (2.12% of GDP) in 2024, drawing from a special €100 billion defense fund. Then in March 2025, lawmakers approved a historic constitutional change exempting defense spending above 1% of GDP from debt limits, effectively creating a €500 billion fund for defense and infrastructure through the mid-2030s.

France committed to raising defense spending to 3.5% of GDP (though without specifying a timeline), while the UK is pushing toward 2.5% by 2027 and adding 12 attack submarines through the AUKUS (Australia, UK, US) program.

The European Commission's "ReArm Europe" plan loosens fiscal rules to allow member states to spend an additional €650 billion on defense. More than half of EU members intend to exceed the bloc's spending limits to fund military modernization.

Here's what makes this remilitarization cycle structurally different from previous defense spending waves.

First, it's multi-decade. These aren't one-time procurement boosts, as countries are committing to sustained 6-8% annual budget growth through 2035. Morningstar projects European defense budgets will grow 6.8% annually from 2024 to 2035, outpacing the U.S. (1.7%), Russia (3.2%), and China (3.1%).

Second, Europe is prioritizing domestic production. For decades, European countries bought American weapons systems because they were cheaper and more advanced. That's changing. The push for "strategic autonomy" means more spending stays within European defense contractors. Germany's procurement, for example, is already majority-sourced from EU suppliers.

Third, the defense industrial base was operating at 50-60% capacity before 2022. There's massive room to scale production without building new factories, though expansion is happening too. Rheinmetall opened new ammunition plants, Leonardo is ramping helicopter production, and KNDS restarted Leopard 2 tank production for the first time since 1992.

Fourth, order backlogs are at record highs and multi-year in nature. Rheinmetall's backlog hit €55 billion (up 44% year-over-year), providing revenue visibility for years.

European defense stocks surged approximately 70% in 2025, crushing broader European equity markets. The rally has been both broad-based and concentrated in a handful of national champions.

Rheinmetall (RHM.DE) - Germany's largest defense contractor became Europe's biggest defense company by market cap (€81.5 billion) and is the clear winner. The stock has risen more than 12x since Russia invaded Ukraine. Revenue grew 28% in the first nine months of 2025, with sales growth projected above 30% annually and earnings jumping 50%. The company produces ammunition, armored vehicles (including the Lynx), air defense systems, and recently acquired a German shipyard to expand into naval systems. The challenge? It trades at 39x forward earnings, which is well above the European defense average of 28x. The market's pricing in several more years of explosive growth.

BAE Systems (BAES.L) - The UK's defense giant and one of Europe's most stable players. BAE generates nearly half its revenue from U.S. Department of Defense contracts, providing geographic diversification and currency hedging. The company won Norway's £10 billion frigate contract in 2025 and supplies 13-15% of the work on every F-35 fighter jet produced. Growth is projected around 7% annually, which is much slower than peers but from a massive base and with more predictable cash flows. Forward P/E of 21 is reasonable for the quality. The stock gained about 50% in 2025.

Leonardo (LDO.MI) - Italy's state-backed aerospace and defense champion, with 83% of revenue from defense. The company leads in warfare electronics, helicopters (the TrekkerM multi-role platform), and participates in major European fighter programs including the Eurofighter Typhoon and the Global Combat Air Program (GCAP) with BAE and Japan's Mitsubishi. Leonardo just partnered with Turkey's Baykar on UAVs, targeting the projected $100 billion European drone market over the next decade. The stock nearly doubled in 2025.

Thales (HO.PA) - France's electronics, radar, and satellite specialist, with a well-diversified 52% defense / 48% civil split. Thales builds air defense systems, avionics for commercial aircraft (strong Airbus relationship), and cybersecurity solutions. The company's balanced business model offers more stability than pure-play defense contractors. Up about 16% in 2025.

Saab (SAAB-B.ST) - Sweden's defense innovator finished 2025 strong, winning France's order for GlobalEye early warning aircraft and Poland's A26 submarine contract (Orka program). The company specializes in air defense, drones, and advanced naval systems. Up approximately 13% in 2025.

Smaller players like Kongsberg (Norway), Dassault Aviation (France), and KNDS (French-German joint venture producing Leopard tanks) also saw significant gains, though with less liquidity for U.S. investors.

For U.S. investors, accessing European defense stocks directly can be cumbersome. Many of these names trade OTC with wide spreads and currency conversion costs.

The cleanest play is the Global X Defense Tech ETF (SHLD), which returned 74% in 2025. SHLD holds a global portfolio focused on defense technology, with significant European exposure including Rheinmetall, Leonardo, Thales, and Saab. The fund's top holdings also include Palantir (U.S. defense tech) and Hanwha Aerospace (South Korea), providing geographic diversification beyond just Europe.

Assets sit around $4.8 billion, the expense ratio is 0.50%, and liquidity is solid. The fund trades at a trailing P/E of 32, which sounds rich until you consider the growth rates (many holdings growing 30-50% annually).

If you want pure European exposure, the Select STOXX Europe Aerospace & Defense ETF (EUAD) provides more concentrated access, though it's smaller and less liquid than SHLD.

For those comfortable with individual stocks, BAE Systems (BAES.F or BAES.Y) and Rheinmetall (RNMBY) trade OTC in the U.S. with decent liquidity. Just be prepared for the 39x valuation on Rheinmetall and realize that at current levels you're paying up for growth.

Defense stocks carry unique risks that don't show up in traditional financial analysis.

Political risk - Governments can cancel programs, delay orders, or change priorities after elections. France and Germany's squabbling over the Future Combat Air System (FCAS) fighter program highlights how multi-national projects can stall indefinitely.

Valuation risk - European defense stocks trade at valuations that assume continued budget growth and flawless execution. Rheinmetall at 39x forward earnings leaves zero room for disappointment. In August 2025, defense stocks dropped 5-8% on mere talk of a potential Ukraine ceasefire, imagine what happens if peace is reached.

Execution risk - Defense programs are notorious for cost overruns, delays, and technical failures. Even established contractors struggle with complex weapons systems.

U.S. competition - If Trump administration policies shift toward requiring NATO allies to "buy American," European defense contractors could lose market share in their home markets.

Peace - This sounds cynical but the reality is that defense stocks fall when geopolitical tensions ease. The thesis depends on sustained threat perception and elevated military spending for years.

This is where we have to again make an extremely important distinction between seeking to profit from war, and seeking to invest in the defense of Europe. The reality is that Europe has made a decision to invest significantly in it’s own defense from foreign adversaries, whereas in the previous decades the United States had carried much of that burden. As has been the case with nations, states, and tribes throughout history, typically the best option is to seek peace but always be prepared to defend yourself. This is something Europe has had the freedom to neglect based on the structure of NATO and the guarantee of US military support for several decades, but can no longer afford to leave themselves vulnerable.

The structural tailwinds strong. In the case of European defense, it’s most important to be selective and size positions appropriately.

I'd focus on companies with diversified revenue (both defense and commercial, or defense plus U.S. exposure like BAE), strong backlogs (Rheinmetall's €55 billion provides visibility), and reasonable valuations relative to growth (BAE at 21x forward looks more sustainable than Rheinmetall at 39x).

For most investors, SHLD makes sense as a small portfolio position(5% or less), depending of course on your strategy and current allocation - with enough exposure to benefit if the remilitarization continues, not so much that a valuation reset destroys you. The fund's global diversification also hedges the Europe-specific risks.

In 2026 it will be critical for this thesis to follow whether countries actually follow through on their 5% GDP commitments (or backtrack due to fiscal constraints), how quickly production scales to meet the order backlog, and whether valuations compress as defense stocks transition from "explosive growth" to "steady growth" mode.

Europe spent the post-Cold War decades cutting defense budgets and enjoying the peace dividend. That era ended in February 2022. The remilitarization of Europe is real, and it's accelerating.

The Earnout Investor provides analysis and research but DOES NOT provide individual financial advice. Jamie Dejter may have a position in some of the stocks, funds, or investments mentioned. All content is for informational purposes only. The Earnout Investor is not a registered investment, legal, or tax advisor, or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.

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