The European Defense Sector Expected to Sustain Valuation Premium Through 2025
The European defense sector is likely to maintain its valuation premium over the broader market through 2025, driven by increased military spending pressures resulting from geopolitical factors, particularly the influence of former U.S. President Donald Trump. Trump’s calls for NATO members to ramp up defense spending to 5% of GDP have contributed to this trend.
According to BofA Securities, NATO’s focus on strengthening capabilities in air defense, offensive weapons systems, and nuclear deterrents, combined with rising budget commitments, supports a favorable outlook for European defense firms. The alliance’s recent move to boost spending targets to 3% of GDP has also led to a shift that is expected to sustain higher valuations for the industry.
The increased expenditure demands come amid a backdrop of rising geopolitical tensions in Eastern Europe and the Arctic regions. European defense companies currently trade at a modest premium to their U.S. counterparts, a change from historical norms when they typically lagged behind. This shift is attributed to an improved growth trajectory and the growing recognition of Europe’s key role in global security dynamics.
New defense technology firms, such as Helsing in Europe and Anduril in the U.S., are also disrupting the traditional defense contracting landscape with innovative offerings like drone swarm technologies and precision munitions systems. The analysts at BofA flag this trend as an important dimension of future industry dynamics, as new entrants inject fresh momentum into the sector.
Overall, the combination of geopolitical pressures, policy shifts within NATO, and disruptive technological advancements sets a supportive stage for the European defense industry. BofA Securities projects that the sector’s strong premium valuation will persist through 2025, supported by both strategic imperatives and market confidence in the industry’s resilience and adaptability.
