Investing.com – The European defense sector is expected to maintain its valuation premium to the broader market through 2025, supported by increasing pressure on military spending due to geopolitical factors, particularly the influence of former U.S. President Donald Trump.
Analysts at BofA Securities point out that Trump’s calls for NATO members to increase defense spending to 5% of GDP are correct.
According to BofA Securities, NATO’s focus on strengthening capabilities in air defense, offensive weapons systems and nuclear deterrence, coupled with increasing budget commitments, underscores the favorable outlook for European defense companies.
The alliance’s recent moves to raise spending targets to 3% of GDP, along with Trump’s push for tougher commitments, signal a shift that will likely lead to higher valuations for the industry.
The increased spending needs come against the backdrop of increasing geopolitical tensions, particularly in Eastern Europe and the Arctic regions.
Currently, European defense companies are trading at a modest premium to their U.S. counterparts, a departure from historical norms in which they have typically lagged. Analysts attribute this change to an improved growth trajectory and increasing recognition of Europe’s key role in global security dynamics.
The higher valuations reflect optimism about the sector’s earnings potential and its ability to benefit from expanding budgets in NATO countries.
Furthermore, the emergence of new defense technology companies is changing the competitive landscape on both sides of the Atlantic. Companies like Helsing in Europe and Anduril in the US are increasingly challenging traditional defense companies with innovative offerings such as drone swarm technologies and precision munitions systems.
BofA analysts describe this trend as an important dimension of future industry dynamics, as new entrants inject new momentum into the sector.
Overall, the combination of geopolitical pressures, political changes within NATO and disruptive technological advances are creating a supportive foundation for the European defense industry.
BofA Securities expects the sector’s strong premium valuation to continue through 2025, supported by both strategic imperatives and market confidence in the industry’s resilience and adaptability.
