European defense stocks are climbing again as Germany moves closer to approving a substantial increase in defense expenditure, a shift that analysts say could pave the way for further gains across the sector.
After several weeks of pressure driven by optimism around a potential ceasefire in Ukraine, the latest signals from Berlin and fresh analysis from major banks have renewed investor appetite for the region’s defense manufacturers.
Morgan Stanley analysts, in a report titled “Tis the Season for EU Defence,” highlighted strong seasonal trends and improving fundamentals, naming Rheinmetall AG as their top pick.
The German defense company, known for producing military tanks, could surge more than 50% over the next 12 months, according to the bank’s projections.
Germany set to approve record military contracts
German lawmakers are expected to approve a record €52 billion (about $61 billion) in military contracts next week, marking one of the country’s most significant commitments to defense procurement in recent years.
The upcoming approval comes as the Trump administration intensifies efforts to push Ukraine toward a peace deal that would end the war, a development that has complicated market expectations for defense spending.
The anticipation of Germany’s expanded military outlays triggered an immediate reaction in the markets.
A Goldman Sachs basket tracking European defense companies jumped roughly 4% on Tuesday, reversing part of the sector’s recent weakness.
Shares had been under pressure as ceasefire discussions advanced, temporarily weighing on growth expectations for defense suppliers.
Morgan Stanley analysts said the backdrop now looks supportive, noting that share momentum “often picks up late in the year and accelerates from January,” historically giving defense stocks a strong start to the calendar year.
Analysts highlight potential winners as sector momentum builds
Jefferies analysts echoed the positive sentiment, positioning Rheinmetall as a key beneficiary of Germany’s forthcoming military orders.
They estimate that the upcoming procurement of Puma infantry fighting vehicles alone may translate to roughly €2 billion in revenue for the company.
Other manufacturers are also expected to gain, with Jefferies pointing to Renk Group AG and Rolls-Royce Holdings Plc, which stand to benefit from transmission and engine sales, respectively.
Rheinmetall shares rose as much as 4.8% following the developments.
Although the stock has more than doubled so far this year, trading has been erratic in recent months amid fluctuating geopolitical signals and evolving investor sentiment around defense demand.
Morgan Stanley’s report underscored additional tailwinds for the industry, arguing that a combination of attractive valuations, supportive seasonality, and modest positioning leaves room for further upside.
According to their data, 56% of global long-only funds have no exposure to European defense stocks, suggesting that institutional participation remains relatively low.
For Rheinmetall specifically, 81% of both European and global long-only funds hold zero exposure, indicating substantial potential for inflows should sentiment continue to improve.
As Germany’s record spending package advances and geopolitical uncertainty persists, analysts say European defense stocks may be entering a new phase of momentum—one that could define early 2026 for the sector.
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