European Defence Stocks Surge on Greenland Rift and Rising Budgets

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Investors in Europe’s defence industry are unintended winners from the Greenland drama, beyond Moscow and Beijing. Donald Trump’s threats towards Denmark have accelerated a trend already underway, as rising military budgets and doubts about the durability of US security guarantees push European arms makers to record valuations. Markets are treating rearmament less as a political choice than as an inevitability, and pricing defence stocks accordingly.

Investors piled into European arms makers in early 2026 as Donald Trump’s threats to buy or even seize Greenland stoked fears of transatlantic discord. The STOXX Europe Defence index jumped to fresh all-time highs, climbing ~10% in one week after Trump’s remarks. On January 12, Reuters reported German weapons maker Rheinmetall up 19% and Saab (Sweden) surging 22% in that week. Saxo Bank strategist Neil Wilson made it clear that “defence stocks are the play” in geopolitics-driven markets. Europe’s defence index had already gained ~57% in 2025, and it hit record levels again as Trump also unveiled plans for a much bigger U.S. military budget. A sharper defence focus in 2026 has seen investors “search for shelter beyond gold” in stockpiles of missiles and tanks. Analysts and traders say the rally is powered by expectations that NATO members will boost spending. Jeremie Peloso of BCA Research said the rhetoric on Greenland “is being sustained” by broader war and budget worries. Many point to fresh U.S. and European spending: Trump’s proposal for a $1.5 trillion U.S. defence budget was seen as bullish even after he threatened to punish defence contractors over output. Europeans, living closer to the conflict in Ukraine, now expect their nations’ leaders to match or exceed 2% of GDP on defence. For example, Germany created a €100 billion special fund and has eased its debt rules so it can spend above 1% of GDP without breaching limits. Across Europe, military investment hit record highs, rising from €343 billion in 2024 to ~€381 billion in 2025, and leaders just agreed to target roughly 5% of GDP (3.5% core defence plus 1.5% security) by 2035.

Forecasts on the Rise

Major companies rode the surge. Shares of British defence giant BAE Systems jumped ~6% on January 8. Italy’s Leonardo, Sweden’s Saab and Germany’s Rheinmetall all climbed several per cent after hitting peak levels. By contrast, U.S. defence stocks, which had sold off on Trump’s buyback threats, later rebounded on higher budget hopes. Industry analysts note that even while dividend and buyback curbs are an “incremental negative,” they are “manageable”. The bigger story is analysts raising forecasts. For example, Pareto Securities in Oslo lifted its 12-month price target on Kongsberg (Norway) to NOK 390, from 280, in mid-January, citing a clear uptrend for Kongsberg’s defence arm and stable order backlogs. Nordea Bank did, likewise, raise its Kongsberg target to 350, from 285, on optimism that Kongsberg’s missiles and naval systems will see growth into the 2030s. These upgrades helped Kongsberg’s stock jump 9–10% in mid-January.

Nordic defence names led much of the run-up. Saab AB of Sweden was already up ~20% for the year by early January, and up 229% over 12 months. Analysts note that Saab still trades below typical sector valuation, about 2.05x book vs ~3.33x sector median, despite huge contract wins, suggesting further upside if order momentum continues. Saab has lined up multi-year deals on Gripen jets, missiles and radars, and government tenders for future fighters are pushing projections higher. Kongsberg Gruppen of Norway likewise saw 2025 momentum. In December, it announced that Kongsberg, 49.9% owner of Finnish Patria, would play a lead role in huge €2 billion-plus German arms contracts. Patria itself (50% Finnish state, 49.9% Kongsberg) said on Dec 18 it won >€2 billion in armoured vehicle deals with Germany. Analysts believe these deliveries, stretching into 2027 and beyond, underpin the bullish outlook. Indeed, Patria’s contracts and Kongsberg’s backlog in naval and air-defence systems contribute to brokers’ forecasting at least 4–5% annual growth.

Strategic Moves and Arms Orders Boom

Investor research also highlights structural changes. For instance, Marketscreener reports that Kongsberg plans to spin off its civilian Kongsberg Maritime arm in April 2026, aiming to unlock value by separating defence from offshore tech. Analysts and fund managers expect such strategic moves, plus the arms-orders boom, to keep shares buoyant. Neil Wilson remarked that geopolitics “is the inescapable story of 2026 thus far,” with defence contractors in line for extraordinary times. Morningstar likewise notes European defence stocks started 2026 with gains of over 20% for big names like Saab and Rheinmetall, after a 2025 rally of some 50–60%.

The End of “Everything”

Amid the market euphoria, Brussels and NATO officials sounded cautious notes. EU foreign policy head Kaja Kallas warned on January 17 that Trump’s polarising moves “play into the hands of China and Russia,” adding “if Greenland’s security is at risk, we can address this inside NATO”. She urged allies not to weaken solidarity, echoing Danish foreign minister Lokke Rasmussen and the UK’s Prime Minister Keir Starmer, who condemned the U.S. threats. Mette Frederiksen, the Danish Prime Minister, warned that any US attack on a Nato ally would be the end of “everything”. “If the United States decides to militarily attack another Nato country, then everything would stop – that includes Nato and therefore post-Second World War security,” Prime Minister Frederiksen told Danish television network TV2.

Even so, many Europeans privately say the episode reminds them of the need for more autonomous defence capacity. Poland, already spending ~4–4.7% of GDP, and Nordic capitals are all increasing air-defence, missiles, and naval procurement.

Valuation Logic: Political Certainty

The Financial Times notes that European defence stocks are no longer trading purely on earnings multiples but increasingly on political certainty. Portfolio managers quoted by the FT describe defence as moving into the same category as energy security after 2022: a sector where governments cannot easily cut spending without accepting strategic risk. The FT highlights that several defence firms are now valued on order backlog visibility extending five to ten years, rather than traditional annual earnings guidance, reflecting expectations that defence budgets will remain structurally elevated regardless of electoral cycles.

Saxo Bank’s equity strategy research frames European defence stocks as a hedge against geopolitical fragmentation, comparable to gold or energy stocks but with stronger cash-flow growth. Saxo analysts argue that Trump’s Greenland rhetoric reinforced a market view that US security guarantees are politically volatile, pushing European investors toward domestic defence champions. Saxo also points out that defence equities are increasingly held by institutional investors who previously avoided the sector on ESG grounds, but now classify defence as “strategic security infrastructure”.

European Business Magazine emphasises that the stock rally is not confined to frontline states. Southern European firms, including Italy’s Leonardo, have benefited as NATO naval and air-defence procurement expands beyond Eastern Europe. The publication highlights that EU-level funding instruments and joint procurement initiatives are quietly reducing political resistance to defence spending in countries that historically underspent, widening the investor base for European arms manufacturers.

The European Parliament’s think-tank analysis stresses that recent defence spending decisions are hard to reverse, because they involve multi-year framework contracts, shared EU procurement and industrial co-production. Once signed, these commitments create fiscal inertia that protects defence budgets even during economic downturns. The paper explicitly warns that cutting defence spending after 2026 would expose governments to contractual penalties and capability gaps, reinforcing investor confidence in long-term revenue streams.

Morningstar’s sector outlook argues that while European defence stocks appear expensive relative to historical averages, they are not overvalued relative to forward cash flows. The firm notes that many companies entered the current cycle with underutilised capacity and low leverage, allowing them to scale production without proportional cost increases. This, Morningstar says, supports margins even as governments pressure firms to increase output.

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