Defense stocks rally on NATO summit, war news

Investing.com -- Defense stocks rallied sharply on Monday as investors reacted to escalating geopolitical tensions and growing expectations around increased NATO spending commitments.

According to J.P. Morgan, seven continental European defense companies within its coverage rose by 3.2% on the day when the U.K. market was closed.

The sector has been on a tear this year, with the European Defence Sector up 115% year-to-date and 20% in the past month on average.

The latest gains followed a weekend of high-impact developments. Notably, Russia launched its most extensive air assaults on Ukraine since the start of the war, and media reports revealed that NATO could soon raise its defense spending targets significantly.

According to a Financial Times report on May 24, Spain was the only NATO member opposing a proposal for allies to allocate 3.5% of GDP to core defense spending, along with an additional 1.5% for defense-related infrastructure.

This would represent a significant increase from the current average of 2.1% recorded in 2024.

The NATO summit in the Netherlands, scheduled for June 24–25, is likely to draw considerable political and market attention. Analysts expect the European Defence Sector could continue to outperform, but they also caution that implementation may be uneven across the continent.

“Whilst we expect a strong increase in total European defence spending in the coming years, there will be significant differences in the magnitude and speed of increases in each country,” the report noted.

In parallel, Russia launched a new wave of missile and drone strikes against Ukraine on May 24–25, described as its “two largest” since February 2022. The BBC suggested the aim was to overwhelm Ukraine’s air defenses and apply psychological pressure.

A report by the BBC said that Russia has ramped up production of drones and missiles this year, adding to concerns of a potential summer offensive.

European defense names including Rheinmetall (ETR:RHMG), RENK Group AG (ETR:R3NK), and Hensoldt Ag (F:HAGG) are some of the strongest performers this year, with year-to-date gains of 200%, 292%, and 137%, respectively.

With several stocks now trading above J.P. Morgan’s published price targets, analysts flagged they “may need to revisit our forecasts in light of fast moving events.”