Al Root

Europe is going to spend more on national defense. A lot more. That should be a good thing for European -- and American -- defense stocks.

Leaders met this week at the annual summit of the North Atlantic Treaty Organization, which includes 32 mostly European nations. Leaders committed to spending 5% of GDP annually on core defense requirements.

That level would imply current European defense spending of about $1 trillion, essentially matching the U.S. annual defense budget. In 2024, Europe spent about EUR326 billion ($512 billion at current exchange rates) on defense.

Europe has more than twice as many people as the U.S. Today, Europe spends roughly $700 a person a year on defense. The U.S. spends closer to $3,000.

The NATO goal is a 2035 target. All the economies of the world should be larger by then. The target implies double-digit defense spending growth across the Atlantic for a decade. U.S. defense spending typically grows at 3% to 4% a year.

Things might not work out that well. "We would not take current NATO expenditures, excluding the U.S., apply an annual real GDP growth rate, and then take 5% of that to arrive at how large European/Canadian defense spending could be by 2035," wrote Capital Alpha Partners analyst Byron Callan on Thursday. The 5% number is for defense spending and infrastructure. "Instead, 3.5% could be used as a notional target" for defense spending itself.

That lower level implies current European defense spending of about $700 billion today and $1 trillion by 2035.

That still implies about 8% or 9% growth in Europe for a decade. Higher spending by allies is something President Donald Trump has wanted for a while. NATO nations appear to have gotten the message.

The NATO declaration was enough to keep European defense stocks rising. Shares of Rheinmetall, Thales, BAE Systems, and Leonardo were up 3.5% on average in overseas trading on Thursday. Since the Nov. 5 presidential election, those four shares gained an average of 126%.

U.S. defense companies, of course, sell to allies. In 2024, Lockheed Martin generated $71 billion in revenue, about 74% from sales in America, and 11% in Europe.

In midday trading on Thursday, shares of Lockheed, General Dynamics, Northrop Grumman, and L3Harris Technologies were up 1.2% on average, while the S&P 500 and Dow Jones Industrial Average were up 0.7% and 0.8%, respectively.

Since the election, shares of large U.S. defense contractors have struggled, despite rising geopolitical tensions. Through midday trading, those four were down an average of 5%. All four had declined, with Lockheed suffering the steepest drop, down about 16%. Increased tension doesn't always change the path of defense spending. What's more, uncertainty about the direction of U.S. defense spending and the future of Lockheed's F-35 fighter jet has weighed on investor sentiment.

A finalized fiscal year 2026 budget could help improve sentiment. The president's initial request for defense spending topped $1 trillion, or about 3.3% of GDP.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 26, 2025 12:49 ET (16:49 GMT)

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