(Bloomberg) — If the tumultuous first 10 days of 2026 have convinced investors in Europe and Asia of anything, it’s that defense stocks are poised for another strong year.
In Ukraine, January has brought fresh attacks as the war pushes deep into another winter. But it’s the US swoop on Venezuela to capture its leader and Donald Trump’s repeated assertions that America should control Greenland rather than NATO partner Denmark that have caused the most alarm.
“It’s a very big wake up call that a key ally, which is the US, cannot be relied on to such a great extent,” said Aneeka Gupta, macroeconomic research director at WisdomTree. “The level of rearmament needs to increase, but the pace of that rearmament also needs to increase.”
A Goldman Sachs Group Inc. basket of European defense companies has surged in January as investors step up wagers on increased military spending by governments in response to an increasingly uncertain world. That’s after a 90% advance in 2025, with the rally also playing out this month for stocks in Japan, South Korea and Taiwan.
Trump’s call for a $500 billion boost to Washington’s defense budget, meanwhile, is helping to fuel the gains because of potential benefits for companies beyond the US. The rush into the sector was well illustrated by a conversation that Bank of America Corp. strategist Michael Hartnett flagged in a note this week with a London client who said “defense is the best secular equity theme … everywhere.”
Analysts at Morningstar Inc. see European defense stocks they cover potentially rising by 20% on average this year, with performance influenced by conditions in domestic economies and exposure to US spending. Trump’s rhetoric over Greenland should lead to an acceleration of a European shift toward self-reliance, analyst Loredana Muharremi wrote.
With Germany at the heart of the region’s military spending plans, arms maker Rheinmetall AG has become an investor favorite. The shares have followed up on a record 150% jump in 2025 by gaining about in January.
“If I only had one stock from my coverage now it would be Rheinmetall,” said Vera Diehl, a portfolio manager at Union Investment Privatfonds GmbH. She sees Saab AB and Kongsberg Gruppen ASA as beneficiaries from Greenland tensions, given their close geographic proximity. “Trump has become even more aggressive and so you think there is more to come.”
The stock rally is also encouraging some of the largest players in Europe’s defense industry to draft plans for going public. Armored vehicle and munitions maker Czechoslovak Group AS, owned by billionaire Michal Strnad, is considering launching an initial public offering in Amsterdam as soon as next week, people familiar with the matter have said.
Defense and security have also quickly emerged as major themes for Asian investors at the start of 2026, given expectations that the region will benefit from export orders.
South Korean contractor Hanwha Aerospace Co. is among those leading the charge, up almost 30% this month after tripling last year. Local peer Hyundai Rotem Co. is up 16%. Taiwan’s Aerospace Industrial Development Corp. and Japan’s Howa Machinery Ltd. are among other gainers from the region.
“We are constructive on large defense suppliers, particularly in South Korea, as they grow their export business and international sales to capitalize on booming global defense spending,” said Weiheng Chen, global investment strategist at JPMorgan Private Bank.
Hanwha Aerospace and Hyundai Rotem are both highly likely to win large-scale export orders from markets such as Iraq and Saudi Arabia this year, according to Cha So-Yoon, an equity investment manager at Taurus Asset Management in Seoul.
Unsurprisingly, US defense stocks are on the rise too in January. A Goldman Sachs basket of the region’s contractors has risen , after a 30% increase in 2025. The boost from Trump’s push for greater military spending was tempered by his plans to limit buybacks and dividends in the sector.
For some, the curb on shareholder payouts could amount to a further positive for defense companies outside the US.
“Restrictions on capital redistribution could weigh on investor appetite for US defense equities, potentially favoring European peers,” said Mediobanca analysts led by Alessandro Pozzi, who assessed BAE Systems Plc and Leonardo SpA to have the greatest exposure to the US budget out of the names in their coverage.
Still, there are potential challenges to the strong outlook for the sector. A breakthrough in Ukraine peace efforts would likely curb sentiment. The other concern is valuations: the latest rally has driven European defense stocks to pricey levels relative to the regional benchmark index.
Last year’s gains cooled in the second half as investors grew impatient over when a splurge on military gear by governments would show up in company earnings.
For now, the market’s prevailing view seems to be that military spending plans will need to rise to match as geopolitical tensions ratchet higher.
“Long-term fundamentals for the sector remain solid as long as countries stay committed to increase their autonomy and improve their defense infrastructure,” said Fabien Benchetrit, head of target allocation for France and Southern Europe at BNP Paribas.
