Europe’s defence sector faces investor doubts despite record public funding
While investors remain divided over whether a bubble is forming among US artificial intelligence giants, Europe’s markets are grappling with a different debate: defence. Despite most European stock indices recovering close to historical highs, the correction in defence stocks has deepened over the past two months and shows no clear signs of easing as the year draws to a close.
After years of strong gains, Europe’s leading defence companies appear to have reached a ceiling. The combined market value of the ten most relevant defence firms in the EU and the UK has fallen by more than €100 billion since their autumn peaks, according to data compiled by Business Insider. These companies had been among the strongest performers in European markets throughout 2025 and previous years, driven by soaring military spending following Russia’s invasion of Ukraine.
The shift in sentiment began as investors started to factor in delays in defence contract awards and budget approvals across several key countries, including Spain, Germany and France. However, the deterioration accelerated after the Trump administration presented a 28-point peace proposal for Ukraine, raising expectations of a potential end to the conflict with Russia and, consequently, a moderation in Europe’s defence spending trajectory.
From market darlings to broad correction
Europe’s push to modernise its military capabilities after February 2022 transformed national defence champions into stock-market stars. Expectations were further fuelled by Donald Trump’s return to the White House and his renewed pressure on NATO allies to raise defence spending to 5% of GDP.
German tank manufacturer Rheinmetall remains the standout performer over the longer term, with shares up around 1,700% in three and a half years. It is followed by Italy’s Leonardo (+600%), Spain’s Indra (+523%), the UK’s BAE Systems (+210%) and France’s Thales (+170%). These gains were underpinned by a wave of contracts spanning weapons systems, armoured vehicles, cybersecurity, communications and military infrastructure.
Yet the outlook has become more uncertain. Budget delays, coupled with the prospect of a negotiated settlement in Ukraine, have led investors to reassess the sector’s growth potential. As a result, companies such as Rheinmetall, Airbus, BAE Systems, Thales and Safran have all recorded significant stock-market losses in recent weeks.
The correction is widespread. Shipbuilder Fincantieri has suffered the sharpest fall, down more than 38% from its October highs, followed by Rheinmetall (-27%), BAE Systems (-22%) and Dassault (-21%). In absolute terms, Airbus has been one of the biggest drags on market capitalisation due to its size, compounded by turbulence in its civil aviation business, which outweighs its defence division. Recent disclosures related to technical issues affecting thousands of A320 aircraft have added further pressure to its share price.
Brussels doubles down on defence investment
Despite market volatility, political momentum behind defence investment in Europe remains strong. On 18 December, the EU Council formally adopted new rules aimed at incentivising and simplifying defence-related investments under the EU budget, reinforcing the bloc’s commitment to strengthening its industrial and technological defence base.
The regulation adjusts several flagship EU programmes — including the European Defence Fund (EDF), Horizon Europe and the Digital Europe Programme — to enable faster, more flexible and better-coordinated funding for defence and dual-use technologies. It also opens the door for Ukrainian entities to participate in collaborative EU defence research and development projects, signalling long-term integration efforts.
Beyond regulatory changes, substantial financial resources are being mobilised. According to Defence-UA, the European Defence Fund will allocate €1 billion in 2026, with a strong focus on air and missile defence systems capable of countering hypersonic threats. Funding will also target next-generation main battle tanks, maritime drones, multiple-launch rocket systems, electronic warfare, artificial intelligence, quantum-secure networks and unmanned combat aviation.
Roughly half of the EDF budget will be devoted to core defence capabilities, while a quarter will support future technologies such as AI-enabled systems and autonomous drone swarms. Since 2021, the fund has channelled around €4 billion into defence projects, a figure expected to grow steadily in the coming years.
A sector caught between markets and geopolitics
Europe’s defence industry now stands at a crossroads. While public funding and strategic ambitions continue to expand, financial markets are adjusting to slower execution, political uncertainty and the possibility of a less militarised European landscape if peace negotiations advance. The tension between long-term strategic investment and short-term investor caution is likely to define the sector well into 2026.
Frequently Asked Questions
Why are European defence stocks falling?
Investor sentiment has weakened due to budget delays in key EU countries and expectations of a potential peace deal in Ukraine, which could limit future military spending growth.
Which companies have been most affected?
Fincantieri, Rheinmetall, BAE Systems and Dassault have led the recent correction, while larger groups like Airbus have seen significant losses in absolute market value.
Is the EU reducing defence spending?
No. The EU is increasing and simplifying defence investment through regulatory changes and expanded funding programs, including the European Defence Fund.
What is the European Defence Fund?
The EDF is an EU program that finances collaborative defence research and development, with a focus on strategic capabilities and future technologies.
Will defence investment in Europe continue to grow?
Yes, public investment is expected to rise in the coming years, although market volatility may persist as investors balance long-term funding against short-term uncertainty.
