MW 'Shocked' EU reaction to White House Zelensky meeting sends defense stocks soaring

By Steve Goldstein

JPMorgan lifts price targets of European defense companies by an average of 25%

The shocking scenes of President Donald Trump and Vice President J.D. Vance dressing down Ukrainian President Volodymyr Zelensky - and the ensuing reaction from European capitals - sent Europe's defense stocks on Monday to their best day in years.

Double-digit percentage gains were seen for Rheinmetall (XE:RHM), Germany's largest arms maker, BAE Systems (UK:BA), the U.K.'s largest defense company; partly Italian government-held arms maker Leonardo (IT:LDO); French fighter jet maker Dassault Aviation (FR:AM); and German radar systems maker Hensoldt (XE:HAG).

The Stoxx aerospace and defense index XX:SXPARO jumped 7%.

A U.S.-listed ETF EUAD that tracks European aerospace and defense stocks had already gained 28% this year.

The biggest news came from Germany, where Bild and other publications report the country's centrist parties are working on creating two large fiscal funds, outside the constitutional debt brake, with at least EUR200 billion ($208 billion) for a special defense fund. The reports also cite studies that Germany may need EUR400 billion of defense spending as well as EUR500 billion in public investment.

There had already been talks of the centrist parties using their brief time before a new parliament for extra spending, but the Oval Office blow-up appeared to accelerate it.

Meanwhile, at a special London summit on Sunday, featuring U.K. Prime Minister Keir Starmer and French President Emmanuel Macron, European countries made a commitment to increase defense spending.

"We think Germany was shocked by that event, which amplified fear that the U.S. is abandoning its role as Europe's benign protector, and we see this as lending support to the fiscal negotiations," said analysts at Evercore ISI.

Robin Winkler, Deutsche Bank's chief German economist, said the higher end of money discussed for the German funds would be as much as has been invested in East Germany since reunification and worth up to 2% of GDP.

Analysts at JPMorgan now say that by the end of 2026, the four biggest European defense companies - BAE, Thales (FR:HO), Leonardo and Rheinmetall - could be trading at 20 times earnings, up from 16 times.

The JPMorgan analysts made back-of-the-envelopment assumptions as they lifted their price targets by average of 25%. They expect the spending of European members of NATO to rise to at least 2.5% of GDP, and point out that right now, about 40% of European defense spending is allocated to equipment development, procurement and maintenance.

"As budgets rise, the share allocated to equipment tends to rise," they say.

They also expect the European NATO members will increase the roughly 40% share of that development, procurement and maintenance with European defense companies.

They did caution that the European defense companies might not increase their sales and earnings guidance this year, given the time needed to increase budgets and then negotiate contracts.

-Steve Goldstein

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March 03, 2025 03:21 ET (08:21 GMT)

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