• European defense stocks are rebounding ahead of the NATO Summit, with investors expecting clear commitments for increased military spending.

• US pressures for defense spending at 5% of GDP and Ukrainian demands for air defense reinforce the need for new funding.

• Despite the long-term rise, the defense sector is underperforming compared to the European market in 2026, due to doubts about the implementation of government commitments.

• States such as Italy, Britain, and Germany are already promoting new multi-billion investment plans to modernize their armed forces.

• Analysts emphasize that Europe maintains the greatest momentum globally in the defense sector, giving priority to advanced air defense and missile protection systems.

European defense stocks face a critical test this week as investors turn their gaze to the NATO Summit in Ankara, expecting clearer signs regarding the level and timeline of new defense spending by member states.

The expectation that the two-day summit will lead to new funding to strengthen military capabilities has driven Goldman Sachs' basket of European defense stocks to its highest level in a month. The relevant index has rebounded by 17% from its June lows, ahead of the talks in the Turkish capital.

At the center of attention is also US President Donald Trump, who is expected to intensify pressure on allies to increase defense spending to 5% of GDP.

Ukraine Increases the Pressure

The escalation of Russian attacks in Ukraine reinforces the sense of urgency, as it highlights Kyiv's shortages in air defense systems.

Ukrainian President Volodymyr Zelenskyy is expected to leverage the NATO Summit to request more weapons systems and military support from western allies.

Morgan Stanley analysts, led by Marie-Angele Riggio, describe the Summit as a "defining catalyst" for the European defense sector.

As they note, stronger commitments from the European Union and the repetition of American pressure for higher military spending can reinforce market confidence in a multi-year upward investment cycle.

Underperformance Against the European Market

Despite the improvement of recent weeks, defense stocks still lag behind the broader European market in 2026.

The sector records a rise of just 3.4%, as investors doubt whether governments will implement their commitments for increased military spending. In contrast, the Stoxx Europe 600 index is gaining nearly 10%.

At the same time, investors appear more selective in their placements, abandoning in several cases large land weapons systems groups in favor of companies operating in air defense and military technologies.

Sector Reshuffling

Rheinmetall faced pressure when the German government abruptly canceled a frigate shipbuilding program, while shortly after, KNDS postponed its planned initial public offering.

Despite the difficulties of 2026, Goldman Sachs' defense stock basket has gained nearly 500% since the Russian invasion of Ukraine in 2022. In 2025 alone, it recorded a rise of about 90%, as pressures from Donald Trump led NATO member states to agree on a gradual increase in defense spending to 5% of GDP by 2035.

Of this percentage, 3.5% is intended for procurement programs and military personnel, while the remainder concerns sectors such as cybersecurity and other critical defense infrastructure.

New Spending Plans in Italy, Britain, and Germany

Early indications show that several European governments are beginning to implement their relevant commitments.

According to a report by the Italian publication La Repubblica, Italy is considering an increase in military and defense spending by approximately €17 billion within the next two years. Mediobanca analyst Alessandro Pozzi estimates that Leonardo and Fincantieri could benefit from this development, as increased funding will significantly accelerate investments.

In Britain, the new investment plan for defense provides for additional spending of £15 billion to modernize the armed forces. According to Morgan Stanley, this development is expected to support the shares of BAE Systems and Rolls-Royce Holdings.

At the same time, Thyssenkrupp Marine Systems is close to securing a €12 billion contract for warships in Germany, while it is also considered the favorite for a major submarine procurement program in Canada, which is estimated to reach $70 billion over several decades. Its stock has already gained 25% since the beginning of the month.

Morgan Stanley analysts estimate that Europe continues to be the region with the greatest momentum in the global defense sector, as governments prioritize the strengthening of land forces, integrated air defense and missile protection systems, as well as long-range weapon systems.

Source: ink.com