A Goldman Sachs Group basket of European defence stocks rose as much as 16% to a fresh record, extending its year-to-date gain to 63%.

European defence stocks surged in early trading after the region’s political leaders met to offer Ukraine their support amid concerns of a US pullback.

The Stoxx Europe 600 Index was up 0.1% at 9.06am in Paris with defence stocks rallying strongly. Rheinmetall jumped 8.9%, Saab rose 11%, and Dassault Aviation gained 15%. A Goldman Sachs Group basket of European defence stocks rose as much as 16% to a fresh record, extending its year-to-date gain to 63%.

“This is the trade of the quarter for sure,” said Mabrouk Chetouane, head of global market strategy at Natixis Global Asset Management. There’s going to be further momentum in sectors like tech and defence as the rally in European equities starts to become more concentrated, he said.

The UK and France have been seeking to build what UK Prime Minister Keir Starmer called a “coalition of the willing” to participate in peacekeeping forces and help reassure Kyiv about the durability of any peace.

French President Emmanuel Macron told Le Figaro newspaper after a gathering in London over the weekend that the EU should provide EUR200 billion ($281 billion) to boost its defence capabilities. 

The prospect of a surge in defence spending by European countries has led to a sharp rally in the shares of companies involved in the sector. Rheinmetall, which is one of Europe’s biggest suppliers of material for land forces, has already gained 67% so far this year and is up more than 800% since the war started three years ago.

Vincent Juvyns, global market strategist at JPMorgan Asset Management, said that public defence spending will rise sharply in the coming years, even if peace in Ukraine remains a possibility for 2025, the recent diplomatic clashes between allies notwithstanding.

“One senses a large consensus for Europe to take its future in its own hands, and that more military spending is coming,” he said.

European stocks have been rallying strongly this year, outperforming the US. February saw the Stoxx Europe 600 extending its lead over the S&P 500 since the end of November 2024.

The European benchmark has outpaced its US peer by 10 percentage points over three months. The prospect of peace in Ukraine has been one of the drivers of the rally.

For BAE Systems, Europe’s largest weapons-maker, defence spending has continued to strengthen over the past year, CEO Charles Woodburn said on a conference call last month.

The British aerospace and defence contractor said the UK’s plan to increase its military budgets will support its major submarine and frigate programs, and that it’s well positioned to benefit from weapons sales to NATO members.

“Our growth opportunities are significant and we remain focused on consistently executing our long term strategy to deliver top line growth, margin expansion and solid cash generation,” Woodburn said.

One question on investors minds is if the region’s defence companies have sufficient capacity available to ramp up output. Even in the event of a peace agreement, there’s a lack of industrial bandwidth available, meaning order books will remain full for years to come. 

Enguerrand Artaz, a macro strategist and fund manager at La Financière de l’Echiquier in Paris, also said that there’s no reason for the momentum in Europe to end.

“The change of mindset regarding defence in Europe is seen as a positive, the German industry can redeploy itself into the sector,” he said. 

On the equity research side, JPMorgan Chase & Co. analysts led by David Perry raised their price targets by an average of 25%, saying the Europe’s rearmament cycle was now “for real” and the US’ increasing reluctance to subsidise the region’s defence would lead to more at-home production and fewer imports.

“The events of the last two weeks have turbo-charged this thesis,” Perry wrote. “We believe that we will now enter a phase where valuation multiples increase, with earnings upgrades following in time.”

Charts: Bloomberg