Investing.com -- The European defense sector is positioned for growth under a potential second term of Donald Trump, according to analysts at Bernstein.
In the aftermath of the recent U.S. election, European defense stocks have seen a strong performance, outpacing their U.S. counterparts.
Bernstein attributes this trend to investor optimism about increased European defense spending amidst heightened geopolitical tensions, coupled with sustained budgetary support in key European countries such as France, the UK, and Germany, despite fiscal challenges.
The analysts emphasize that Trump's return could amplify the urgency for European nations to bolster their defense capabilities, especially as Russia continues its aggression in Ukraine and tensions in the broader region escalate.
Developments include North Korea's military support for Russia and Ukraine's use of advanced Western weaponry.
Such dynamics highlight the sustained need for deterrence, which has prompted European nations to reconsider decades of defense underinvestment.
France and the UK recently reaffirmed their defense budget commitments, signaling robust financial backing for the sector.
Germany, too, could see an increase in defense investment if proposed reforms to its strict debt brake materialize following its upcoming federal elections.
Company-specific developments further underline the sector's promise. Firms like Rheinmetall (ETR:RHMG) and Leonardo have posted strong earnings and ambitious growth targets, with Rheinmetall planning to double revenue by 2027.
Despite uncertainties, such as the potential impact of a ceasefire in Ukraine, Bernstein argues that the long-term trajectory for the European defense sector remains positive.
The analysts suggest that even a negotiated settlement unfavorable to Ukraine could increase the need for European nations to take greater responsibility for regional security, given their reliance on U.S. support.
This scenario would likely drive further investments into defense infrastructure and capabilities.
While risks exist, including the potential for tariff impositions and fluctuations in defense spending levels, the structural shift towards heightened defense priorities in Europe suggests a bright outlook for the sector.