European Defense Stocks Rebound Amid Tariff Turmoil as Investors Eye Long-Term Growth

LONDON — European defense stocks staged a partial recovery on Monday after a sharp early-session sell-off triggered by broader market fears surrounding U.S. President Donald Trump’s sweeping tariff announcement last week. The move has sent shockwaves through global markets, fueling investor uncertainty and prompting widespread portfolio rebalancing.

Despite initial losses, stocks in the defense sector clawed back ground by the close of European trading hours, as analysts pointed to underlying strength in long-term defense spending and strategic independence drives across the continent.

Defense Stocks Weather Global Sell-Off

Germany’s Rheinmetall, initially on track for its worst trading day on record with a steep drop of nearly 27%, pared losses to end 2.5% lower. Fellow German defense players Thyssenkrupp and Renk Group also trimmed early declines, closing down 3.25% and 2.5% respectively.

French defense contractor Thales slipped 4.25%, Sweden’s Saab fell 2.6%, while Italy’s Leonardo finished the day 3.3% in the red.

In the U.S., defense stalwarts were also not immune to the downturn. Shares of Lockheed Martin dropped 1%, General Dynamics lost 1.24%, and Northrop Grumman declined by 0.9% as Wall Street faced a third consecutive day of sharp losses.

The broader equity rout has been driven by growing concerns over the global economic fallout from Trump's tariff plan, which includes a flat 10% tariff on most countries and steeper levies on automotive, steel, and aluminum imports.

Analysts Urge Calm, Highlight Growth Outlook

Despite the market jitters, analysts argue that the long-term fundamentals for European defense companies remain intact, largely shielded from tariff fallout due to strategic diversification and strong local demand.

Ben Heelan, head of EMEA aerospace and defense research at Bank of America, told CNBC that the tariff impact on European defense firms is expected to be “pretty small,” citing solid growth trajectories and increased visibility in defense budgets.

“We now have five to 10 years of runway for growth as Europe moves toward allocating 3% of GDP to defense,” Heelan said, adding that the current stock price correction presents a “great opportunity” for long-term investors.

He noted that the upcoming Q1 earnings season will serve as a key inflection point, with companies expected to provide critical updates on capability expansions and supply chain strategies.

Geopolitical Tailwinds Strengthen Sector Outlook

Europe’s defense push has been gaining momentum following mounting pressure from the United States, with President Trump repeatedly criticizing NATO allies for underinvesting in their own national security.

In response, European governments have signaled a shift toward self-reliance. Germany has enacted a historic debt reform to fund a major defense modernization initiative, while U.K. Prime Minister Keir Starmer has committed to increasing Britain’s defense budget.

Moreover, the European Union is preparing to mobilize €800 billion in funding to bolster regional security and strategic autonomy, a move widely seen as favorable for domestic defense contractors.

Tariff Concerns Remain — But Risks Appear Contained

Loredana Muharremi, equity research analyst at Morningstar, said that even if Trump’s tariffs were extended to defense-related imports, the impact on Europe’s defense firms would likely remain limited.

“Most leading European defense players — including BAE Systems, Rheinmetall, Thales, Saab, and Leonardo — have already expanded their industrial footprint in the United States. This not only enhances their access to U.S. contracts but also serves as a natural hedge against potential trade barriers,” Muharremi told CNBC via email.

She added that Europe continues to be a net importer of U.S. defense equipment, reducing the likelihood of immediate retaliatory measures in the military sector.