European defense stocks have already rallied in the opening days of 2026, building on a defining year for the sector in 2025. Events surrounding Venezuela, Greenland and Iran at the start of the year have amplified fears of ongoing global military conflict and have accelerated talk of a “defense supercycle.”
Some key European weapons manufacturers have posted gains of more than 20% in the first trading days of the year: Sweden’s SAAB SAAB B, which manufacturers aircraft, sensors, and munitions, is among the top-performers, rising 28% in Swedish krona, a near 200% uplift in the last 12 months. Germany’s Rheinmetall has increased in value by 22% in euros in 2026, also close to a 200% rise since January 2025.
The rally also shows up in the performance of the Morningstar Developed Europe Aerospace & Defense Index. It is up nearly 13% since the start of the year in GBP—its best ever start to a year since inception. Top holdings include the largest UK publicly-listed defense stock by market capitalization, Rolls-Royce RR., which is up 11% in pounds since the start of the year and Italy’s Leonardo LDO, which is 18% higher in euros.
Venezuela, Greenland, and Iran Spur Early 2026 Defense Rally
Geopolitical events in the first week of January have set the tone for another year of military activity. On Jan. 3, 2026, the US government captured the Venezuelan president, Nicolás Maduro, in a military operation.
A day later, the US president, Donald Trump, reiterated a proposal to annex Greenland, prompting international political consternation. Days after that, on Jan. 7, Trump issued an executive order stopping US defense contractors from prioritizing stock buybacks and executive pay ahead of increased production, which bolstered European defense stocks again.
On the same day, Trump called for what would amount to a 66% increase in 2027 US defense budget. Events in Iran thereafter have prompted speculation over US military intervention in the country.
Should Investors Back a Defense Supercycle?
Such events present a multi-scenario case for investing in the sector and back the idea of a “defense supercycle,” says Morningstar equity analyst Loredana Muharremi. Much hinges on whether the US commits to increased spending on the military budget.
“If approved, a higher US defense budget signals persistently elevated geopolitical risk […] While US prime [defense contractors] are the primary beneficiaries, we expect European primes with direct US exposure and production capacity to also see incremental upside,” according to Muharremi.
“The White House has not excluded military options for Greenland. Even if this remains negotiation rhetoric, it raises tensions and can lead to accelerating European defense integration, joint procurement, and a shift toward continental industrial self-reliance,” she says. “The rhetoric supports our midterm view of faster equipment spending amid rising geopolitical tensions.”
For now, Morningstar analysts retain their previously stated projections for USD 200 billion in increased funding for research and development and military procurement among NATO countries within 10 years.
Is Rheinmetall Stock Still a Buy Today?
Though certain stocks have begun the year strongly, shares in several European defense contractors are now overvalued, in Saab’s case significantly so. At SEK 695, its stock is trading significantly above its Morningstar fair value estimate of SEK 490, putting it firmly in 1-star territory. Though Rolls-Royce and Leonardo are fairly valued and in three-star territory according to Morningstar analysts, both stocks are trading above their fair value estimates.
German defense giant Rheinmetall RHM was one of the standout European stocks of 2025 as it benefited from uncertainty over the future of NATO and ongoing conflict in Ukraine. Morningstar analysts made three upward revisions to its fair value estimate in 2025. Despite a 22% rise in its share price in the year to date, its stock remains undervalued, trading in 4-star territory. France’s Thales HO and Dassault Systemes DSY are also screening as undervalued.
“Rheinmetall is best placed for ammunition and land systems capacity expansion,” Morningstar’s Muharremi says.
Will Defense Stocks Continue to Perform in 2026?
Fund managers, analysts, and commentators expect defense to remain a key investing theme as the rest of the year unfolds.
“Governments are directing capital toward infrastructure, defense and strategic sectors. Together, these policies create the most supportive backdrop for growth in years,” says Quintet Private Bank chief investment officer Daniele Antonucci.
It’s not just hardware in the form of vehicles and materiel that’s required. Mining and minerals, another key talking point in Europe and the UK in 2025, are crucial to enabling higher defense production.
“These materials are not only essential for hyperscale data centers but also critical for defense applications and national security,” says Henrietta Pacquement, fixed income chief operating officer at Allspring.
“Their strategic importance has intensified bilateral partnerships such as the USD 8.5 billion US—Australia agreements to co-invest in critical minerals and rare earth projects with the goal of reducing China’s dominance.”
Overall, investors should expect defense stocks to remain in the headlines.
“In time, we expect President Donald Trump to dial down some of his rhetoric, especially around Greenland, and his defense spending ‘plan’ is likely to be an aspirational target rather than set in stone,” says XTB research director Kathleen Brooks.
“Even so, the first week of trading in January is likely to set the tone for some time and defense is expected to be one of the key themes for the year.”
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