Investing.com – The European defense sector is expected to maintain its value in the broader market through 2025, supported by increased military spending pressure driven by political conditions, particularly the influence of former US President Donald Trump.
Analysts at BofA Securities indicate that Trump's calls for NATO members to increase defense spending to 5% of GDP.
According to BofA security, NATO's focus on strengthening air defense capabilities, offensive weapons systems, and nuclear deterrents, combined with rising budget commitments, underlines the positive outlook for European defense firms.
The coalition's recent moves to increase the spending target to 3% of GDP, alongside Trump's push for tougher commitments, signal changes that could keep costs high in the industry.
The rise in spending claims comes amid increasing pressure on the country's climate, particularly in Eastern Europe and the Arctic regions.
Currently, European defense companies are trading at a lower price than their US counterparts, a reversal from historical trends when they were lagging behind. Analysts attribute this change to improved growth patterns and increased recognition of Europe's leading role in global security.
The high valuation reflects optimism about the sector's potential revenue and the potential to capitalize on budget expansion in NATO countries.
In addition, the emergence of new defense technology firms is changing the competitive landscape on both sides of the Atlantic. Companies such as Helsing in Europe and Anduril in the US are increasingly challenging traditional defense contractors with new offerings, such as drone swarm technology and precision munitions systems.
BofA analysts flag this trend as an important indicator of future industry changes, with new entrants injecting new momentum into the sector.
Overall, a combination of geopolitical pressures, policy changes within NATO, and disruptive technological advances are setting the stage for supporting the European defense industry.
BofA Securities projects that strong premium valuations for the sector will continue through 2025, supported by both strategic imperatives and market confidence in the strength and flexibility of the industry.