Europe defense stocks cool as investors question crowded war trade

Europe’s defense trade is running into a hard reality check. After soaring more than 450% since Russia’s full-scale invasion of Ukraine in 2022, the MSCI Europe Aerospace and Defence Index fell 9.2% in March, its biggest monthly drop in five years, as investors took profits and questioned how much of the war premium was already priced in.

The pullback has come even though the strategic case for higher military spending has not gone away. NATO said European allies and Canada were spending 1.47% of collective GDP on defense in 2014, and that share would reach 2% in 2024. In 2025, NATO expected all 32 members to meet or exceed the alliance’s 2% target. Germany’s post-2022 push for rearmament, including a €100 billion special fund for the Bundeswehr, and Berlin’s later move to loosen debt rules, reinforced the case for a long spending cycle. France also locked in a historic €413.3 billion military planning law for 2024 to 2030, voted on June 7, 2023.

What has changed is investor patience. Order intake has been slower than some traders expected, and contracts have often been phased or delayed as France and Britain wrestle with fiscal pressure. Martin Frandsen of Principal Asset Management said there had been a lot of “de-grossing” as financial institutions and retail investors trimmed exposure amid uncertainty. That shift matters because the market is no longer paying simply for the existence of demand; it is demanding proof that spending turns into orders, revenue and earnings quickly enough to justify stretched valuations.

The contrast between military need and market pricing is visible in company data. Rheinmetall’s 2025 annual report showed a €63.8 billion order backlog and €9.9 billion in sales, evidence that demand remains deep even as the share price cools. Saab said 2025 was a record year and that it built a record order backlog for the future. Yet the stock market has still given back some of the earlier gains in names such as Rheinmetall, Renk and Saab, while Czech maker CSG has fallen nearly a third since the conflict began.

Rheinmetall has argued that higher spending on air defense is inevitable, and the broad direction of European rearmament still points upward. But the latest selloff suggests investors are drawing a sharper line between a durable policy trend and a crowded trade that may have run ahead of delivery. In defense, as in any sector, strategic necessity does not prevent valuation from resetting.