Defense stocks on the rise as potential growth sector?
European Defense Stocks Surge Amid Geopolitical Tensions and Military Spending
European defense stocks are experiencing a significant growth spurt in 2025, outpacing the typical growth rates of US big tech and AI sectors. This surge is primarily driven by rising geopolitical tensions, NATO's target for increased defense spending, and the ongoing Russia-Ukraine war.
BAE Systems (LON:BA.) came in at number five on Interactive Investor's platform during June, while Rolls-Royce (LON:RR.) topped the list. Both companies have shown impressive financial performance in their half-year results. BAE Systems reported an 11% year-on-year increase in revenue to £14.6 billion and a 13% rise in underlying EBIT to £1.55 billion. Rolls-Royce posted 11% year-on-year revenue growth to £9.1 billion and a 50% increase in underlying operating profit to £1.7 billion.
The Select STOXX Europe Aerospace & Defense ETF (EUAD) has soared about 78% year-to-date, reflecting strong investor appetite as European nations ramp up military spending and prioritize strategic autonomy. NATO's 2025 summit outlined a goal for member states to spend 5% of GDP on defense by 2035, boosting demand and investment prospects for European defense companies.
European defense companies have performed well under President Trump's administration and amid global instability. In contrast, the US defense sector also benefits from a record $849.8 billion defense budget in 2025, with strong growth in hypersonic tech and Unmanned Aerial Systems (UAS), but it faces tariffs that strain margins. Key defense companies show resilience through diversification.
Meanwhile, US big tech and AI sectors continue to grow robustly but face a more complex macroeconomic and regulatory environment. The intense geopolitical focus on defense spending in Europe presents a sharper growth narrative for defense stocks relative to tech/AI, at least in the near term.
UK investors think the defense and military sector will see the most growth over the next six months, according to a survey by trading platform IG. Of the 1,800 clients IG surveyed, 55% put defense stocks in their top three sectors for expected growth. Semiconductors equipment was the third most preferred sector for expected growth, while AI-related industries were the second most preferred.
Investors can buy defense stocks via a stocks and shares ISA. The Future of Defence UCITS ETF (LON:NATO) gives exposure to a portfolio of forward-looking companies that have exposure to the defense theme, and are screened for NATO alignment. All holdings are domiciled in NATO or NATO-allied countries.
Loredana Muharremi, equity analyst at Morningstar, believes the recent EU-US trade deal could benefit European defense stocks, even if it offers greater advantages to US firms in the sector. There has been a rotation away from US stocks, according to the article, with European nations expected to decrease their reliance on US equipment over time and increase their purchases from European primes.
In conclusion, European defense stocks are seeing accelerated growth in 2025, outpacing typical growth rates of US big tech and AI sectors amid geopolitical and military spending surges. Investors are advised to consider strategic diversification given regional risks and evolving geopolitical dynamics.
Investors are increasingly looking towards European defense stocks for investing opportunities, considering the significant growth spurt in 2025, outpaced by US big tech and AI sectors. This growth is attributed to tariffs that strain margins in the US defense sector, while European defense stocks benefit from geopolitical tensions and technology advancements in defense industries.
