Too big an opportunity to ignore: Europe’s booming defence sector
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Key takeaways
- Europe has entered an era of rearmament after rising uncertainty over US security guarantees and the erosion of the post-war security settlement.
- European countries, notably Germany and France, are significantly increasing domestic military spending in response to NATO commitments and perceived threats.
- With EU policy driving strategic autonomy and unlocking transformative investment in the sector, European defence stocks now present a generational opportunity for investors seeking long-term structural growth exposure.1
Defence stocks in Europe have shot into the spotlight as the post-war security order has been shaken, prompting European countries to boost military spending in a bid to respond to NATO commitments and achieve self-reliance amid mounting threats.
With US security guarantees increasingly uncertain, Europe is scrambling to repair decades of chronic underinvestment through a raft of massive spending measures designed to bolster neglected defensive capabilities in the face of rising geopolitical instability.
Source: Amundi Investment Institute, internal estimations based on NATO data as of 6 March 2025.
Information given for illustrative purposes only, may change without prior notice
Today, most European countries are significantly increasing military spending and channelling it towards domestic defence industries, strengthening the region’s technological and industrial base.
Germany and France: Leading the rearmament push
Notably, Germany and also France are at the forefront of this rearmament drive. Germany, Europe’s biggest economy, has overhauled its fiscal rules to enable a significant increase in military expenditure, while also establishing a €500 billion special fund for infrastructure projects over the next 12 years.2 Meanwhile, France’s President Emmanuel Macron is considering leveraging the country’s Public Investment Bank to finance the defence industry, alongside plans to raise defence spending from 2.1% of GDP to 3%.3
Rearmament requires major investment
Comparing the investment levels and defence capabilities of the major global powers reveals the scale of the security disparities European countries are seeking to address. While the US currently spends 3.4% of GDP on defence and Russia 6.7%, the EU and UK spend a combined 2%. China spends less in GDP terms (1.7%), but its economic scale and sustained investment underscore the challenges facing European countries.4
While Europe has a short-term urgency to support Ukraine, it has recognised the need to spend more to boost its own security and defence, whatever the outcome of the Russia/Ukraine war.
A powerful EU response
In parallel with national initiatives, the European Union is stepping up its efforts to support the region’s rearmament drive.
A key pillar of this effort is the European Defence Fund (EDF),5 which supports companies across EU Member States in developing competitive and collaborative defence projects. The EDF has helped lay the foundation for a more integrated and strategically autonomous defence industrial base—creating powerful tailwinds for the sector and generating long-term opportunities for investors.
Building on this foundation, in March 2025 the European Commission unveiled an ambitious new defence package aimed at driving a surge in investment across the sector. Launched under the ReArm Europe Plan / Readiness 2030,6 the plan enables national defence spending of over €800 billion and empowers the Commission to raise up to €150 billion to allow member states to massively scale up their defence investments through common procurement from the European defence industry, focusing on priority capabilities.
Announcing the plan, European Commission President Ursula von der Leyen declared:
We are taking decisive action…with increased defence spending, important investments in European defence industrial capabilities. We must buy more European.
Who will be the winners?
There is no shortage of potential beneficiaries of the surge in defence spending, with Europe home to dozens of world-class companies operating in and around the sector. Previously under-the-radar national champions like France’s Thales, Germany’s Rheinmetall and Italy’s Leonardo have risen to prominence as the market has recognised their potential to benefit from higher defence spending.
Meanwhile companies like Rolls-Royce, Airbus and BAE Systems are longtime leading lights of the global defence sector, demonstrating the breadth and quality of options in Europe for those seeking to benefit from structurally elevated security spending.
Investors are already showing appetite for European defence exposure. Industrial ETF strategies collected €1.1bn in March, with the popularity of defence stocks largely driving this growth.7
The wider equities outlook
While investors have been scaling back their exposure to US equities this year and rotating into Europe, valuations remain attractive relative to the US stock market.
Moreover, European equities generally offer higher dividend payout ratios compared to US stocks. For instance, the Stoxx Europe 600 offers an estimated dividend yield of 3.5%, significantly higher than the 1.5% yield of the S&P 500.8
Conclusion: A sector with the growth potential to outweigh short-term volatility9
Volatility has risen across global equity markets since trade tariffs were announced by the Trump administration, and risks of sharp moves remain with lingering uncertainty demanding vigilance from market participants.10
However, as Europe embraces a more coherent security policy, with broad support for vast additional defence spending and fiscal stimulus, European defence stocks offer investors a generational opportunity to gain exposure to a segment of the market with long-term growth potential.11
Access the opportunity
1. Investment involves risks. For more information, please refer to the Risk section below.
2. Reuters, Germany approves overhaul of debt rules and €500 billion special fund, March 2025.
3. Reuters, France to raise €5 billion for defence sector funding, says Finance Minister, March 2025.
4. Source: Amundi Investment Institute, data March 2025. Information given for illustrative purposes only, may change without prior notice
5. https://defence-industry-space.ec.europa.eu/eu-defence-industry/european-defence-fund-edf-official-webpage-european-commission_en
6. https://ec.europa.eu/commission/presscorner/detail/en/ip_25_793
7. “European ETFs draw €1.1 billion into industrial strategies in March,” RankiaPro, April 2025. Available at: https://rankiapro.com/en/insights/european-etf-flow-quarter.
8. Source: Amundi, Bloomberg as at 30/04/2025. Past performance is not a reliable indicator of future performance. For more information regarding the index methodology, please refer to index providers websites.
9. Investment involves risks. For more information, please refer to the Risk section below.
10. Past market trends are not a reliable indicator of future ones.
11. Investment involves risks. For more information, please refer to the Risk section below.
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