Arms stocks break records: an opportunity for investors?

Defence sector growth in Europe has reached new highs thanks to increased defence spending and the drive for strategic independence from the US. The STOXX Europe Aerospace & Defense Index rose 9% over the week, with Hensoldt (+22%), Leonardo (+16%) and Dassault Aviation (+15%) posting the strongest gains.

However, the biggest winners remain Rheinmetall $RHM.DE (+96% this year, +1146% since 2022) and BAE Systems $BA.L (+39% this year, +167% since the Russian invasion).

Reasons for the rise in arms stocks:

Massive investment in European defense

- EU's €800 billion rearmament plan

- Reducing dependence on the US

High demand for military equipment

- Europe lacks sufficient production capacity, which drives up prices

-Some contracts may still go to US firms such as Lockheed Martin $LMT or Northrop Grumman $NOC

Geopolitical uncertainty increases demand for defence

- The war in Ukraine and global tensions are pushing countries to spend more on the military

Risks and potential problems:

Overvaluation of European equities

-Rheinmetall $RHM.DE trades at 55 times 2025 earnings → extremely high valuations

Capacity constraints on European arms plants

- Some companies may not be able to keep up with demand, giving space to US companies

Possible declines in US stock prices due to US budget cuts

- Federal defense spending declines, but military orders remain stable

Investment strategy: where to look for opportunities:

European arms companies (growth potential, but expensive stocks)

-Rheinmetall $RHM.DE - extreme growth but high valuations

-BAE Systems $BA.L - long-time leader in the European defense industry

-Leonardo $LDO.MI - high growth Italian manufacturer

US arms companies (more stable, potential for buying after correction)

-Lockheed Martin $LMT - world leader in defense

-Northrop Grumman $NOC - aerospace defense specialist

-Textron $TXT - manufacturer of military helicopters and aircraft

Is it worth investing in arms stocks now?

WHY YES?

Strong demand for defense due to geopolitical conflicts

Massive EU investment in European arms companies

Opportunity for US companies to grow after the recent downturn

WHAT TO WATCH OUT FOR?

- Extremely high valuations of European companies (possibility of correction)

- Capacity constraints on European manufacturers (may help US firms)

- Potential decline in US defence budgets

➡ Conclusion: European arms stocks offer strong growth but are expensive. US firms may be attractive after the recent correction. Over the long term, the defence sector is a stable investment sector.