In recent weeks, European defense stocks have increased significantly, while the prices of American weapons companies have come under noticeable pressure. The background is US President Donald Trump's announcements to reduce Pentagon spending while pushing for a greater defense burden on Europe. These opposing signs drive an unusual dynamic: Rheinmetall and Leonardo each rose in double digits, while US companies like Lockheed Martin or Northrop Grumman lost value. Defense companies from Germany, Italy, and other European countries benefit from the expectation that European governments will invest more money in defense and security – especially since Trump's blatant threat to reduce US protection for Europe. This shifts the focus more towards responsibility for their own defense expenditures, which encourages stock market investors towards further orders and revenue potential. "The political signal was clear," says Capital Alpha Partners: "European states cannot permanently rely on US support.
On the other hand, the large US companies are initially unsettled. The Pentagon must make budget cuts of about 8 percent—approximately $50 billion—in the upcoming fiscal year according to the new Trump administration's directives, with the option for further savings in the following years. The crucial factor is whether these cuts will affect personnel costs or major projects such as weapon systems and research. Analysts assume that at least part of the cuts will impact procurement programs, which could also reduce margins and order volumes for "primes" like Raytheon, General Dynamics, or Northrop Grumman. Companies like Palantir or Anduril, which specialize in AI and software solutions for military purposes, are already experiencing stock gains thanks to a close connection to Trump and his administration team. Observers speak of a potential "redistribution" within the defense budget, away from classic defense systems towards cyber and AI-driven applications.
How sustainable this scenario will be remains to be seen. Although there is "broad support for a strong military" among U.S. congressmen, as recently emphasized by Raytheon CEO Chris Calio, the fact is that public discussions around cuts, delayed contract awards, or potential program reductions complicate the planning of traditional U.S. defense manufacturers. European companies, on the other hand, are actively planning production expansions or new collaborations due to foreseeable increases in spending, especially as the threat environment does not ease due to global tensions. Northrop Grumman CEO Kathy Warden recently tempered expectations for the first quarter of 2025, citing pending budget decisions: "With the change in administration, there may be delays in contract awards." The real growth prospects, Warden said, would only become "visible later in the year.
Nonetheless, the US defense industry could be strengthened again by geopolitical risks, opines Byron Callan of Capital Alpha Partners. "The global situation is constructive for defense projects, but the rigid austerity plans of the Trump administration are a major uncertainty," Callan says. In Europe, on the other hand, the outlook is now much more favorable: The recent increase in defense budgets and the renewed security policy awareness since 2022 promise rising investments in tanks, air defense, and other military technologies.
