A storming rally in European defence stocks has gone into reverse this year on concerns over how the continent will fund its military spending plans and as investors instead look to drone makers and companies more focused on modern, high-tech warfare.
The Stoxx Europe Targeted Defence index has fallen more than 15 per cent since its peak in January, with much of that coming since the start of the US-Israeli war against Iran, wiping billions of euros from the values of companies including BAE Systems, Rolls-Royce, Thales, Leonardo and Rheinmetall.
The fall marks an abrupt reversal in what had become one of the biggest trades in European equity markets in recent years. The defence index had risen more than 40 per cent every year since 2022, when Russia invaded Ukraine, and in 2025 it almost doubled, fuelled by Germany’s massive infrastructure and military investment plans and a Nato agreement to raise defence spending to 5 per cent of GDP.