Investors are piling into a European defense spending “mega-trend,” turbo-charged by a mix of EU, national and private capital funding that’s set to run well into the next decade. As several of Europe’s leading defense stocks surged to near-20% returns in the opening week of 2026, investors now see the sector as a long-term bet, shaped both by current tensions over Venezuela and Greenland , and longer-term concerns over the continent’s defense capabilities and the future of NATO . Raphaël Thuin, head of capital markets strategies at Tikehau Capital , said multiple factors — including the ongoing threat from Russia, and the end of the U.S. defense umbrella in Europe — underpin what he called a “mega-trend in the making.” Thuin said the “depleted state” of European security, after decades of underinvestment, now urgently needs to be addressed. “Regardless of Ukraine, regardless of the peace plan — which we hope obviously will be signed soon — this trend should go much beyond. When you think of Russia, and the potential threat that Russia represents for European countries, it’s not going away,” Thuin told CNBC’s “Europe Early Edition” last week . He added that the end of the U.S. defense “umbrella” over Europe is a central pillar of the investment theme. “Whatever administration comes next, it will certainly not pay for European security,” he added. RHM-DE YTD mountain Rheinmetall. Defense stocks soar Global defense capabilities have been thrust into the spotlight by the geopolitical turmoil underpinning the first week of 2026. The overthrow of Venezuela’s President Nicolas Maduro by U.S. forces on Jan. 3 was followed by renewed tensions over Greenland and potential fissures within NATO. President Donald Trump maintains that the U.S. “needs” Greenland for “national security,” raising questions over the future of the Transatlantic alliance and placing long-term European defense capabilities under fresh scrutiny. Separately, France and the U.K. signed a declaration of intent last week to deploy troops to Ukraine in the event of any peace agreement. Aneeka Gupta, director of macroeconomic research at WisdomTree, said the stalled Ukraine peace efforts, Greenland tensions and Venezuela operation all provide fresh catalysts for defense in 2026, following a record year in 2025. “[They] validate Europe’s decision to lock in much higher spend and to localize critical capabilities, reinforcing the multi-trillion rearmament pipeline,” Gupta said in a note. German defense giant Rheinmetall is up 22.8% year-to-date, while Italian peer Leonardo has risen 19.7%. Tank parts maker Renk had advanced 23.1%, while radar and surveillance specialist Hensoldt gained 25.6%. Saab , the Swedish fighter jet maker, has notched a 29.9% year-to-date return. The Stoxx Europe Total Market Aerospace and Defense Index finished 2025 up 56.5%. Despite stronger growth and profit expectations, European defense stocks still trade at a discount to U.S. peers, at about 28 times earnings versus over 30 in the U.S. “There is limited room for error — this is part of the risk of investing in defense stocks,” Thuin said. “We might also see a bit of differentiation between stocks now, but if you project over two, three, or five years, those stocks are not that expensive anymore.” Follow the money Investors point to spending commitments at both the national and European Union level, including the 800-billion-euro ($841 billion) Rearm Europe initiative , as well as the growing political support for mobilizing private capital. “Defense companies are supported by long-term EU and NATO military spending plans, in our view — regardless of near-term fluctuations caused by geopolitical developments,” said Helen Jewell, international chief investment officer, BlackRock Fundamental Equities, in an equity market outlook. Thuin said: “We know that we are now collectively targeting 2.5% of GDP in military equipment and military spending, and up to 5% if you include security and cybersecurity — this is going to take years to deploy.” LDO-IT YTD mountain Leonardo. He added: “There is also a strong willingness among European governments to ensure private capital is also invested in this space. European savings can also finance this push towards more resilience, more sovereignty, in defense and elsewhere. That’s also a very encouraging sign, and is probably a long-term trend in the making.” Fawaz Chaudhry, chief investment officer at Fulcrum Asset Management, told CNBC’s “Europe Early Edition” on Jan. 5 that the U.S.’ demonstration of “hard power” in Venezuela on Saturday was a “signaling exercise” that would prove a catalyst for “more military spending, more rearmament, of Europe, of Asia.” Rebuilding capacity Thuin, meanwhile, said European defense stocks stand to benefit both from the drive towards greater regional sovereignty and higher military spending within the bloc, as well as growing demand from beyond the continent, where these companies are major exporters. “We see this military horse race happening elsewhere,” he added. “We have the potential to see order books building from both Europe and outside Europe.” Gupta also underlined the importance of this new hard power era for investors in defense. “The new catalysts tilt the balance further toward European contractors: they enjoy cleaner capital return stories, direct budget tailwinds from multiple theatres, and a growing premium on European strategic autonomy versus a more politically volatile US security umbrella,” Gupta noted. Tikehau itself is already “very much invested” in the trend, Thuin said, with $3 billion of assets allocated to defense and cybersecurity. He conceded the potential for short-term volatility if a lasting peace agreement in Ukraine emerges, acknowledging the late 2025 defense stock sell-off , but urged investors to focus on the longer-term picture. “Right now, many of those military equipment producers in Europe are focused on delivering equipment for Ukraine — mainly tanks, armored vehicles, ammunition,” he said. “But very soon after that we will have to rebuild our military capacity in Europe. Missiles, air defense systems, fighter jets, warships — there is a broad range of equipment to be addressed.”
