Unstable Global Climate Signals New Phase for Defense Stock Surge

Defense Stocks Surge Amid Global Uncertainty

Photographer: Nick Paleologos/Bloomberg

As 2026 begins with heightened geopolitical tensions, investors across Europe and Asia are increasingly optimistic about the prospects for defense sector equities.

Escalating Conflicts and Political Moves Drive Market Sentiment

The ongoing conflict in Ukraine has intensified with renewed hostilities this January, marking another harsh winter of warfare. However, the most significant shocks have come from the United States: a dramatic intervention in Venezuela and former President Donald Trump’s repeated claims that the US should control Greenland, rather than its NATO ally Denmark, have unsettled global markets.

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“This is a stark reminder that the US, a crucial ally, may not always be dependable,” observed Aneeka Gupta, director of macroeconomic research at WisdomTree. “Not only must rearmament efforts increase, but the speed of these initiatives must also accelerate.”

Photographer: Nick Paleologos/Bloomberg

Defense Shares Rally Across Europe and Asia

European defense companies tracked by Goldman Sachs have seen their stocks climb sharply in January, as investors anticipate governments will ramp up military budgets in response to a more volatile world. This follows a remarkable 90% surge in 2025, with similar upward trends observed in Japan, South Korea, and Taiwan.

Trump’s proposal to raise the US defense budget by $500 billion has further fueled optimism, as the potential benefits are expected to extend beyond American firms. Bank of America strategist Michael Hartnett highlighted a conversation with a London-based client who described defense as “the most compelling long-term equity theme globally.”

Morningstar analysts predict that European defense shares under their coverage could appreciate by an average of 20% this year, though performance will depend on domestic economic conditions and exposure to US spending. Analyst Loredana Muharremi noted that Trump’s Greenland rhetoric is likely to accelerate Europe’s move toward greater self-sufficiency in defense.

Key Players and Regional Standouts

Germany’s Rheinmetall AG has emerged as a top pick among investors, building on a record 150% gain in 2025 with further increases this January. Portfolio manager Vera Diehl of Union Investment Privatfonds GmbH favors Rheinmetall, while also identifying Saab AB and Kongsberg Gruppen ASA as likely beneficiaries of heightened tensions over Greenland due to their geographic proximity. “Trump’s increasingly aggressive stance suggests more developments ahead,” she added.

IPO Activity and Asian Momentum

The robust performance of defense stocks is prompting some of Europe’s largest defense firms to consider public offerings. Czechoslovak Group AS, a major producer of armored vehicles and munitions owned by billionaire Michal Strnad, is reportedly weighing an IPO in Amsterdam as early as next week.

In Asia, defense and security themes have quickly gained traction among investors, with expectations that the region will benefit from increased export demand. South Korea’s Hanwha Aerospace Co. has surged nearly 30% this month after tripling in value last year, while Hyundai Rotem Co. is up 16%. Taiwan’s Aerospace Industrial Development Corp. and Japan’s Howa Machinery Ltd. are also among the region’s top performers.

Expert Insights on Global Defense Growth

Weiheng Chen, global investment strategist at JPMorgan Private Bank, commented, “We are optimistic about large defense suppliers, especially in South Korea, as they expand their export and international sales to capitalize on rising global defense expenditures.”

Cha So-Yoon, equity investment manager at Taurus Asset Management in Seoul, expects Hanwha Aerospace and Hyundai Rotem to secure significant export contracts from countries such as Iraq and Saudi Arabia this year.

US Defense Stocks and Policy Impacts

American defense companies have also seen their shares rise in January, with a Goldman Sachs index of US contractors posting gains after a 30% increase in 2025. However, Trump’s plans to restrict buybacks and dividends in the sector have tempered some of the enthusiasm.

Some analysts believe that these restrictions could actually benefit non-US defense firms. Mediobanca’s Alessandro Pozzi and his team noted that limits on capital returns might dampen investor interest in US defense stocks, potentially making European companies like BAE Systems Plc and Leonardo SpA more attractive, given their significant exposure to the US defense budget.

Risks and Valuation Concerns

Despite the strong outlook, there are potential headwinds. A diplomatic breakthrough in Ukraine could dampen demand for defense stocks. Additionally, the recent rally has pushed European defense valuations to historically high levels compared to regional benchmarks.

Last year, gains in the sector slowed in the second half as investors awaited evidence that increased government spending would translate into higher corporate earnings.

Currently, the consensus is that military budgets will need to keep rising as geopolitical risks escalate.

“The sector’s long-term prospects remain robust as long as nations continue to prioritize autonomy and the modernization of their defense capabilities,” said Fabien Benchetrit, head of target allocation for France and Southern Europe at BNP Paribas.

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