European Defense Sectors Rise Amid Escalating Rhetoric on US Trade Tariffs
European defense stocks are rising for the third consecutive session. Investors are pricing in increased EU military budgets amid new US trade threats and instability in trade relations with China.
Analytical article: Europe's defense sector — why old 'hawks' are falling and new technologies are taking off
[The Gist]: What's Really Happening
Headlines about European defense stocks rising for the third straight session create a false impression of a unified rally. Yes, Rheinmetall, BAE Systems, Thales, and Leonardo have indeed shown positive momentum in recent days. But looking at the three-month timeframe, the picture becomes alarming: Rheinmetall is down 25%, Saab 20%, Leonardo 17%, BAE Systems 13%, and Dassault Aviation 11%.
The main non-obvious insight, completely absent from Western media, is that Europe's defense sector is undergoing not a correction but a structural revaluation. Investors are no longer buying 'everything' in hopes of rising military budgets. They now differentiate companies based on three critical criteria: geographic diversification, technological exposure, and the ability to convert record order backlogs into profit.
The numbers speak for themselves. According to Tikehau Capital, hedge fund long positions in the European defense sector have shrunk from $23 billion to $12 billion in recent months. Short positions have meanwhile risen to 4% of free float — the highest level since February 2025. This is not 'profit-taking.' It is a reassessment of the entire investment thesis.
Behind the last three days' rise are specific events that media lump together. First, the announcement of new US tariffs on steel, aluminum, and copper, effective June 8, 2026. Second, escalating rhetoric between the US and Europe amid threats of expanded sanctions. Third, real data on order backlogs, which continue to break records.
Timeline and Context
The situation developed rapidly, and it is the speed of change that created the gap between market prices and fundamentals. On June 1, 2026, Trump signed a proclamation expanding tariffs on steel, aluminum, and copper, effective June 8. The new measures affected not only direct metal shipments but also derivative products — agricultural machinery, HVAC systems, industrial equipment.
Below is a timeline of key events explaining why the defense sector rose, but selectively:
| Date | Event | Defense Sector Reaction |
|---|---|---|
| June 1, 2026 | Trump signs expansion of Section 232 tariffs on steel, aluminum, copper | Cautious decline on trade war fears |
| June 2, 2026 | USTR proposes additional 10-12.5% tariffs on 60 countries following forced labor investigation | European indices fall, defense holds |
| June 8, 2026 | New tariffs take effect, EU threatens retaliatory measures | Defense sector begins to rise |
| June 9-11, 2026 | Bloomberg and other media report risks of trade war with China | Third consecutive session of defense stock gains |
| June 12, 2026 | Analysts publish data on hedge fund long positions shrinking from $23B to $12B | Correction in leaders (Rheinmetall -25% over 3 months) |
An important contextual point: the trade war with the US is not the only driver. Political instability within Europe also plays a role. In France, the Senate blocked a request for additional military budget funding of €50 billion through 2030. This was a serious signal that even with external threats, European politicians cannot always agree.
At the same time, Poland, which spends 4.8% of GDP on defense (the highest percentage in NATO), called on France, Italy, and Spain to increase military spending. France spends 2.05% of GDP, Italy 2.01%, Spain 2.0%. The gap with Poland of 2.8 percentage points is not just a number. It is a measure of how different threat perception can be within the same alliance.
Who Wins and Who Loses
Winners. Companies with strong order backlogs and diversified geography. Rheinmetall has an order backlog of €73 billion, covering 6.4 years of current revenue. Leonardo — €57 billion (2.4 years), Thales — €53 billion (2.4 years), BAE Systems — £83.6 billion (2.7 years). These companies do not depend on monthly political decisions — their profits are predetermined for years ahead.
Also winning are defense electronics manufacturers — a sub-sector that the market has begun to value separately from 'heavy' defense. The median EV/2025E EBITDA multiple for defense electronics is 18.7x versus 16.7x for the overall European defense sector and 14.9x for the US. Investors are willing to pay a premium for technology (radars, sensors, C4ISR systems, electronic warfare), not for tanks and howitzers.
Losers. Companies whose business models depend on traditional heavy weaponry (artillery, tanks, armored vehicles). Rheinmetall, despite a record order backlog, has lost 22% year-to-date after Q4 2025 results slightly missed expectations. This illustrates the new reality: the market has become demanding. Any deviation from forecasts is severely punished.
Also losing are companies dependent on European government procurement, which can be blocked by political processes. French Dassault Aviation lost 11% over three months. The reason is not weakness in the Rafale — the aircraft sells well. The reason is uncertainty about long-term funding for the French military budget.
A special category of losers: companies that failed to adapt to the new technological reality. The rising availability and low cost of drones and autonomous systems are changing the game. A drone costing a few thousand dollars can destroy a tank or armored personnel carrier that costs 1,000 times more. Investors ask: why pay a premium for manufacturers of vulnerable platforms?
What the Media Isn't Saying
The first and most important untold story is the divergence within the sector that the market is only beginning to realize. The US-EU trade conflict does not hit all defense companies evenly, but those with supply chains intersecting with US tariffs. Steel and aluminum are critical materials for the military industry. European manufacturers that buy US steel or sell products in the US will come under pressure.
The second hidden factor is the political vulnerability of European rearmament. Earlier in 2026, it seemed the consensus on the need to increase defense budgets was unshakable. But May events in France, where the Senate blocked €50 billion in additional funding, showed otherwise. Investors are now pricing in the risk that promised budgets may not materialize in full.
The third underreported factor is Europe's decreasing dependence on US weapons as a structural trend. As FSMOne notes, Europe is increasingly realizing that US military support can become conditional, transactional, and politically reversible. This is not a short-term factor. It is a 5-10 year cycle of replacing US systems (F-35, Patriot, HIMARS) with European equivalents (Eurofighter, SAMP/T, CAESAR). For European manufacturers, this means not just budget growth but import substitution — a much more powerful driver.
And finally, the fourth omission — Q1 2026 data, which confirms that demand is real, but execution is company-specific. Thales showed organic revenue growth of 9.7% and strong defense orders. Saab reported EBIT growth of 32%. But Airbus showed weak results at the group level due to delays in commercial deliveries, not defense demand. This means the 'defense uplift' does not lift all boats equally.
Forecast: Next 30 Days and 90 Days
Next 30 days (to mid-July 2026). The key factor is the Fed's decisions on June 16-17 and their impact on the dollar. A strong dollar makes European exports (including weapons) more expensive for buyers outside the eurozone, but increases the value of dollar-denominated contracts when converted to euros. Base case: the Fed holding rates will lead to a temporary dollar weakening, supporting European stocks, including defense.
More importantly, the Bank of England meeting on June 18 and the Bank of Japan meeting on June 15-16. These central banks' decisions will affect global liquidity, and through it, interest in the 'rearmament story.' I expect the defense sector to continue playing catch-up from the last three days, but without previous enthusiasm. Political uncertainty in France and the trade war with the US will cap gains.
Technical view: Rheinmetall, down 25% in three months, is in oversold territory. A short-term bounce is possible, but sustainable growth needs new catalysts — for example, specific contracts or removal of political blockages in France.
Next 90 days (to mid-September 2026). Here the main variable is the US decision on additional tariffs on 60 countries, with hearings scheduled for July 7, 2026. If tariffs are imposed, Europe will retaliate with mirror measures. A trade war will hit global supply chains, including defense, which uses components from various countries.
However, the medium-term outlook remains positive for fundamental reasons. European defense companies trade at 19.7x 2028E P/E versus our fair value multiple estimate of 26x. This implies upside potential of about 32% over the investment horizon. The defense sector is moving from a 'revaluation on rumors' phase to a 'confirmation by fundamentals' phase, and Q1 2026 shows this transition is proceeding successfully.
By September, I expect differentiation within the sector to intensify. Winners will be companies with strong order backlogs (Rheinmetall, Thales, BAE Systems) and technological exposure (defense electronics, drones, cybersecurity). Losers will be 'heavy' manufacturers without technological upgrades and companies dependent on politically unstable national budgets (e.g., French).
Editorial Forecast
Asset: Rheinmetall shares (RHM.DE). Direction: moderate growth over the next 24-72 hours amid renewed interest in 'oversold' defense stocks and escalating US-EU trade rhetoric. Expect movement to €480-490 from current levels around €450. Key levels: support — €430 (52-week low), resistance — €510 (50-day moving average). Confidence level: low (40%). Main risk: if France definitively blocks additional military spending or US-EU tariff talks move toward de-escalation, the 'defense rally' could fizzle, and Rheinmetall could return to test support at €430. Watch news from Paris and Brussels — the political factor now outweighs the fundamental.
— Editorial Team
