European defence stocks under fire: is the long-term investment case changing?

Key takeaways

• US political uncertainty and Rheinmetall's weaker outlook have exposed growing doubts about defence companies' ambitious growth expectations.
• Europe's rearmament remains a structural priority, supported by rising military budgets and long-term security needs.
• Investors should focus on valuations, contract execution and cash generation rather than spending promises alone.

After years of enthusiasm surrounding Europe's rearmament, the sector has come under renewed pressure. The Democratic sweep in the US midterm elections has raised questions about future American military spending, while Germany's Rheinmetall has disappointed investors with another reduction to its annual outlook.

Yet Europe's need to strengthen its defences has hardly disappeared. Military budgets continue to rise, and governments remain committed to rebuilding capabilities after years of underinvestment.

The question for investors is whether the defence boom is losing momentum or whether expectations have simply become too demanding.

When strong growth is no longer enough

Rheinmetall, Germany's leading manufacturer of ammunition, armoured vehicles and air defence systems, illustrates the problem.

On 5 November, the company lowered its 2026 revenue forecast to approximately 13.2 billion EUR, from 13.7–14.2 billion EUR, citing delays in military contracts and ammunition deliveries. Its shares subsequently suffered a sharp selloff.

The disappointment is particularly interesting because the underlying business remains strong. Sales increased 38% in the first nine months of 2026, operating profit rose 68%, and its backlog reached 78 billion EUR, including signed framework agreements.

In other words, Rheinmetall is growing rapidly, just not as rapidly as investors expected.

The US midterm elections have added another layer of uncertainty. Democratic control of Congress could bring greater scrutiny of Washington's ambitious defence spending plans, particularly affecting European contractors with substantial US exposure, such as Britain's BAE Systems.

But the bigger lesson is about expectations. When investors already anticipate years of exceptional growth, even temporary delays can trigger substantial share price declines.

A great industry does not automatically make every company a great investment, particularly at the wrong price.

Europe's rearmament is bigger than one election

The structural case for European defence remains compelling.

European Union defence expenditure is projected to reach 454 billion EUR in 2026, up from 418 billion EUR in 2025. Meanwhile, NATO members have committed to spending 5% of gross domestic product on defence and security-related requirements by 2035, including at least 3.5% on core defence.

These commitments reflect longer-term priorities: replacing depleted equipment, expanding military production, strengthening European capabilities and reducing dependence on the United States.

However, there is an important distinction.

A political commitment is not a signed contract. A signed contract is not revenue. And revenue is not necessarily cash.

Governments must translate their ambitions into budgets, procurement decisions and actual deliveries. That process can take years, particularly when public finances are constrained and manufacturers struggle to expand capacity.

The underlying demand may therefore remain strong even as individual companies experience delays and disappointments.