Investing.com – The European defense sector is expected to maintain its valuation premium over the broader market through 2025, supported by increasing military spending pressures driven by geopolitical factors, particularly the influence of former US President Donald Trump.
Analysts at BofA Securities note Trump's calls for NATO members to increase defense spending to 5% of GDP.
According to BofA Securities, NATO's focus on strengthening capabilities in air defence, offensive weapons systems, and nuclear deterrence, combined with increased budget commitments, underscores the positive outlook for European defense companies.
Recent moves by the coalition to boost spending targets to 3% of GDP, coupled with Trump's push for stronger commitments, signal a shift that is likely to sustain the industry's higher valuations.
The increase in spending requests comes amid escalating geopolitical tensions, especially in Eastern Europe and the Arctic region.
Currently, European defense companies trade at a modest premium to their American counterparts, a shift from historical norms when they typically laggards. Analysts attribute this change to an improved growth trajectory and growing recognition of the key role played by Europe in global security dynamics.
The high valuations reflect optimism about the sector's earnings potential and its ability to benefit from growing budgets in NATO countries.
In addition, the emergence of new defense technology companies is changing the competitive landscape on both sides of the Atlantic. Companies such as Hellsing in Europe and Anduril in the United States are increasingly challenging traditional defense contractors with innovative offerings, such as drone swarm technologies and precision munitions systems.
Analysts at Bank of America point to this trend as an important dimension of future industry dynamics, as new entrants inject new momentum into the sector.
Overall, the combination of geopolitical pressures, political shifts within NATO, and disruptive technological advances is setting a supportive stage for the European defense industry.
BofA Securities expects the sector's strong premium valuation to continue into 2025, supported by strategic imperatives and market confidence in the industry's resilience and adaptability.
