European Defense Stocks in the Company of Luxury LVMH and Hermès

The boom in military spending in Europe has elevated defense companies to levels where their market capitalization is comparable to the largest luxury goods manufacturers. Historically, the defense sector was considered low-margin, but it has now become an area with high growth potential, and investors are buying shares faster than analysts can adjust target prices.

According to data from Goldman Sachs, cited by Bloomberg, the forward valuation of a basket of European defense stocks has surged in recent weeks, reaching the average P/E of European luxury manufacturers. Shares of German tank and ammunition manufacturer Rheinmetall have nearly doubled since the beginning of 2025. This has led to a record increase in the company’s projected valuation, which now sits between luxury market leader LVMH and Hermès, the maker of iconic Birkin bags, Bloomberg reports.

This surge has also impacted other European weapon manufacturers, including Thales and Leonardo. The optimism of stock market investors is based on promises from the German government for investments of hundreds of billions of euros in defense, as well as the desire of European authorities to follow suit. On March 11, shares of Rheinmetall jumped another four percent after the German Green Party expressed readiness to reach an agreement with the government to increase defense spending as early as this week.

Profitability of Investment in the Defense Sector

– The growth prospects for these [defense] companies today are completely different than they were six months ago. They may seem expensive right now, but that is only because the market and Wall Street have not yet caught up to raise earnings forecasts – said Graham Benke, fund manager at Amati Global Investors, to Bloomberg.

The market is debating whether double-digit earnings growth can be expected in this sector, said Robert Lancastle from J O Hambro, whose fund holds shares in Thales, Leonardo, and Saab.

– If double-digit growth is realistic – and we do not think it is impossible – then, for example, shares of Thales do not look overpriced – added Lancastle.

Some analysts believe that valuations are already excessively inflated, especially since Rheinmetall’s shares have risen more than 10 times since February 2022. Christian Kers from Warburg Research last week downgraded his recommendation for Rheinmetall from ‘buy’ to ‘hold’, noting that the current stock value is already supported by the projected increase in military spending to three percent of GDP.

– In that context, we advise investors to secure profits – he advised.

Goldman Sachs and JPMorgan Chase believe that the growth potential of European defense stocks has not yet been exhausted.

– European defense companies are starting to look expensive even compared to American ones, but the growth expectations are so high that they still appear reasonably valued – wrote the analytical team at Goldman Sachs led by Guillaume Jeisson.

JPMorgan analysts, led by Mislav Matejko, stated that they will ‘remain optimistic about the defense sector’ even in the event of a ceasefire between Ukraine and Russia.

Launch of an Exchange-Traded Fund (ETF)

Europe has launched the first exchange-traded fund (ETF) that focuses exclusively on the European defense sector, amid growing investor interest. The WisdomTree Europe Defence Ucits ETF was listed on the exchanges in Milan and Frankfurt on March 11, and trading on the London Stock Exchange will begin on March 12, reported the British Financial Times.

The ETF portfolio includes 20 European manufacturers of civil and military equipment, defense electronics, and aerospace technology. The fund does not invest in companies involved in the development of internationally banned weapons, such as cluster munitions and landmines.

The largest share in the index is held by Rheinmetall, which makes up 18 percent of the fund. This is followed by Italian Leonardo (15 percent), Swedish Saab and British BAE Systems (10 percent each), and French Thales (9 percent). A high concentration of assets in a limited number of companies usually represents a warning sign for thematic funds. However, WisdomTree explains the high representation of Rheinmetall by the fact that its shares have nearly doubled in value since the beginning of the year.

Previous European ETFs have mostly offered global exposure, notes the FT. Since the beginning of the year, investors have significantly invested in the two largest defense ETFs: VanEck Defence Ucits and HANetf Future of Defence. Both funds have over 50 percent exposure to American companies.