Investing.com -- The European defense sector is expected to sustain its valuation premium over the broader market through 2025, buoyed by increased military spending pressures driven by geopolitical factors, particularly the influence of former U.S. President Donald Trump.
Analysts at BofA Securities indicate that Trump's calls for NATO members to ramp up defense spending to 5% of GDP.
As per BofA Securities, NATO’s focus on strengthening capabilities in air defense, offensive weapons systems, and nuclear deterrents, combined with rising budget commitments, underscores a favorable outlook for European defense firms.
The alliance's recent moves to boost spending targets to 3% of GDP, alongside Trump’s push for more robust commitments, signal a shift that is likely to sustain higher valuations for the industry.
The increased expenditure demands come amid a backdrop of rising 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 shift from historical norms when they typically lagged behind. Analysts attribute this change to an improved growth trajectory and the rising 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 capitalize on expanding budgets across NATO countries.
Additionally, the emergence of new defense technology firms is altering the competitive landscape on both sides of the Atlantic. Companies like Helsing in Europe and Anduril in the U.S. are increasingly challenging traditional defense contractors with innovative offerings, such as drone swarm technologies and precision munitions systems.
The analysts at BofA flag this trend as an important dimension of future industry dynamics, with new entrants injecting fresh momentum into the sector.
Overall, the combination of geopolitical pressures, policy shifts within NATO, and disruptive technological advancements sets a supportive stage for the European defense industry.
BofA Securities projects that the sector’s strong premium valuation will persist through 2025, supported by both strategic imperatives and market confidence in the industry's resilience and adaptability.