Why European Defence Stocks Are Up 45% and What Happens When the War Ends

European defence stocks have risen 45% since February 28. Here is who is buying, what they expect, and the specific financial risk of the sector's dependence on geopolitical tension.

Rheinmetall's stock has risen approximately 45 percent since February 28, 2026. BAE Systems has risen approximately 35 percent. Leonardo, MBDA's parent, and Saab have seen comparable appreciation. European defence as a sector has been the best-performing area of European equity markets in 2026, driven by the combination of the Iran war's visible conflict, the NATO uncertainty creating rearmament urgency, and the Ukraine war's continued ammunition demand.

The investor base buying European defence stocks is diverse. Traditional institutional investors who had European defence in their portfolios pre-2022 have seen significant appreciation. Sovereign wealth funds, particularly from the Gulf states whose own defence spending is accelerating, have been expanding European defence positions. ESG-focused funds that previously excluded weapons manufacturers are updating their investment frameworks — as we've discussed, the concept of 'strategic independence finance' is incorporating defence bonds and defence equity into previously clean portfolios.

The forward-looking financial risk in European defence exposure is specific and worth stating clearly: the sector's current valuation partially prices for a sustained elevated defence spending environment. This is the base case — European rearmament is structural, the Ukraine war is unlikely to fully resolve in 2026, and the Iran war has created permanent air defence demand. But the sector is also priced with a premium for the current conflict intensity that would decompress if the Iran war ends and if US-Russia relations somehow improve.

For individual investors evaluating European defence: the structural case — genuinely elevated European defence spending for a decade — is strong. The cyclical component — additional premium for current acute conflict intensity — is less durable. The two components are not easily separated in current valuations, which means investors are buying a combination of structural and cyclical exposure whose separation will happen at an uncertain future moment.