In the Spotlight Trend of the Month
Geopolitical dynamics are always changing, but this year has seen a particularly rapid and unsettling shift in the landscape.
From the conflict in the Middle East to America’s lack of commitment to NATO, the global security backdrop has become profoundly more complex and uncertain.
As countries have re-evaluated their defense postures and prioritised national security, the defense sector has experienced a surge in activity and investment, especially in Europe. eToro’s EuropeDefense Smart Portfolio, launched in April, consists of European companies across the defense and aerospace supply and value chain. This Smart Portfolio is available for investors who want to benefit from the potential increase in defense investments. Here’s a look at some specific developments that have driven European defense stocks higher in 2025.
Europe’s era of rearmament
European defense stocks began rallying back in early March after US President Donald Trump briefly paused US military assistance to Ukraine and cast doubt on his willingness to defend NATO allies in the future (NATO is a 75-year-old transatlantic alliance with a mutual assistance clause in which an attack on one member is considered an attack on all). These developments put European countries on high alert as the US has been the single largest provider of military aid to Ukraine since the war with Russia started in 2022 and a weakened NATO alliance could potentially lead to further Russian aggression beyond Ukraine.
Given the national security threat, countries across Europe scrambled to increase their defense budgets in an effort to protect themselves. In the UK, Prime Minister Keir Starmer announced that Britain would increase its spending on defense from 2.3% of GDP to 2.5% – the largest increase since the Cold War. Meanwhile, in Germany, Chancellor-in-waiting Friedrich Merz proposed a special €500 billion fund to enable investment in defense. As for the European Commission, it announced a five-part plan to mobilise up to €800 billion in new defense spending over the next four years, declaring that Europe had entered an “era of rearmament.”
It’s worth pointing out that Europe has underspent on defense capabilities for decades now. According to JP Morgan, since the end of the Cold War in the early 1990s, the European defense industry has amassed a near €2 trillion spending gap (what was spent on defense over that period versus what would have been spent if the NATO target of 2% of GDP had been met). Given this gap, Europe has some catching up to do. This bodes well for European defense contractors such as Rheinmetall, BAE Systems, and Leonardo, which are poised to benefit from any increase in investment.
A pivotal moment for NATO
However, the increased levels of defense spending announced in March were just the start of a much larger, ongoing strategic shift. In June, the outlook for defense stocks got another boost when NATO member countries committed to spending 5% of GDP on defense by 2035 at the 2025 NATO Summit. This was a pivotal development for the transatlantic alliance as 5% of GDP represents a huge jump from the previous benchmark of 2% of GDP and it is likely to benefit a range of defense businesses including ammunition manufacturers, missile and drone defense companies, and cybersecurity specialists. The new spending target is to be segmented, with at least 3.5% of GDP going towards “core defense requirements” and the remaining 1.5% going to broader defense and security-related investments.
The conflict in the Middle East
Of course, the conflict between Israel and Iran has also put defense stocks in the spotlight this year. As a result of this conflict, both Israel and Iran will likely seek to bolster their defense capabilities in the near future, as will other nations in the region and globally. Note that this conflict – which began on June 13 when Israel launched a sophisticated air strike on Iran in an effort to prevent the development of that country’s nuclear weapons – has highlighted the need for missile defense systems, drones, AI-based cybersecurity, and other tech-based solutions. In an era of advanced warfare, military superiority increasingly depends on having a technological edge.
Major defense deals in 2025
We have already seen a number of major defense deals across Europe in 2025. For example, in February, the Netherlands purchased 22 Skyranger 30 short-range air defense systems from Germany’s Rheinmetall for a total of around $1.35 billion. Then, in March, Denmark announced the procurement of between 250 and 1,000 MISTRAL 3 surface-to-air missiles to strengthen its short-range air defense. These missiles are made by MBDA – which is jointly owned by Airbus, BAE Systems, and Leonardo – and cost over $500,000 each. More recently, in July, Sweden signed ammunition deals worth $526 million with Rheinmetall and Norwegian company Nammo. Also in July, Turkey announced plans to acquire 40 Eurofighter Typhoon fighter jets from Britain and Germany.
eToro’s EuropeDefense Smart Portfolio
Those seeking exposure to the rapidly growing European defense industry may want to check out eToro’s EuropeDefense Smart Portfolio. This portfolio offers diversified exposure to the European defense and aerospace ecosystem, from firms specialising in aircraft and naval systems to those developing surveillance technologies and tactical equipment. Stocks in the portfolio at present include the likes of Rheinmetall, BAE Systems, Rolls-Royce, Leonardo, and Thales. The portfolio’s holdings are predominantly in EUR (with some GBP, SEK, and NOK exposure), meaning that it offers a way to diversify away from the US dollar, which could be beneficial if the greenback continues to weaken.
