(BFM Stock Exchange) – The sector has experienced an impressive stock rally for a few weeks, pushing these titles on very high levels of valuation. Have defense actions reach a glass ceiling?

If there has been an essential stock market since the start of the year, it is European defense. The actions of this industry signs vertiginous performance.

On the whole of 2025, Rheinmetall, which notably provides armored vehicles to the German army, takes 122.75% and Hensoldt, specialist in sensors and military optronics, advances from 109.6% to Frankfurt. Renk, who produces gearboxes and transmission systems for military vehicles and sea ships, wins 119%.

On the Paris Stock Exchange, Thales recorded the strongest increase in CAC 40 with a jump of 80.4% when Dassault Aviation climbs 56.1%. Small and medium capitalizations are not to be outdone. Exossens, specializing in military imagery and photo-detection, takes 65.7%, and EXAIL Technologies, which designs underwater drones to detect mines, earns 91.8%.

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As the infographic above shows, all European defense groups jump. These actions fully outline European indices, since the Stoxx Europe 600 only takes 7% over the same period.

In February, the broker Charles Schwab wondered if European defense groups had not become the “new magnificent seven on the stock market”, in reference to the seven “Big Techs” of Wall Street (Tesla, Apple, Nvidia, Microsoft, Meta, Alphabet, Amazon) which experienced vertiginous increases in 2023 and 2024.

This stock market dynamic is obviously linked to the recent actions of European leaders. Aware that it is now much less necessary to count on the United States and much more on themselves to ensure the safety of the old continent, these leaders have multiplied, in recent weeks, the announcements of increases in military spending.

In a note written on March 3, Oddo BHF spoke of a “new era for European defense”.

“The recent interactions between Ukrainian President Zelensky and Donald Trump have sparked alarms on Europe’s vulnerabilities in defense,” said the independent alphavalue design office.

Hundreds of billions of euros in additional expenses

On February 28, the American president caused a world shock wave by being aggressive with his Ukrainian counterpart, Volodymyr Zelensky, summoning him to agree with Russian President Vladimir Putin. And this in front of cameras around the world. Zelensky left the meeting, and the agreement which was to be established between Ukraine and the United States was returned to the Greek calendars.

This episode accelerated initiatives. A few days later, Emmanuel Macron spoke of a target of defense expenditure ranging from 3% to 3.5% of the gross domestic product (against 2% for the time being within NATO). On March 4, the European Commission then unveiled its “Rearm Europe” project which intended to mobilize nearly 800 billion euros in the defense.

Germany has announced a Copernican revolution. Long known for its frugality in terms of public spending, deficit and debt, the first European economy announced last week a vast plan to strengthen its defense but also its infrastructure. The orders of quantities amount to several hundred billion euros. On Friday, the political agreement established between environmentalists and the conservatives, who should allow the adoption of this plan to the German Parliament, still propelled defense groups on the stock market.

As an illustrative basis, AlphaValue calculates that if European military budgets increased to around 4% of the gross domestic product, scenario deemed plausible by the independent design office, the rise in annual defense expenses would be 474 billion euros (for a total of 800 billion euros).

Potential? “There is not”

The fact remains that an adage on the stock market wants the trees not going up to heaven. It is also allowed to wonder if the market did not put the cart before the oxen.

The valuations of defense groups are currently reaching high levels. The Thales action is exchanged 27.8 times the benefits expected in 2025, that of Rheinmetall 43.9 times. These multiples are much closer to those of software groups, which can claim high valuations due to their significant share of recurring, or luxury income than industrialists.

Some leaders have also been cautious about the realization of political declarations in orders and therefore in sound and stumbling species. “The proof is in the pudding,” said Thales CEO, Patrice Caine last week. What can be roughly translated by “we wait to judge on pieces”. “I am waiting, I observe,” said Dassault Aviation CEO, Éric Trappier,

In view of these elements, do defense groups in Europe still have potential on the stock market?

“There is none,” says an analyst specializing in the sector. “The market is far ahead in the deployment of military spending and defense actions will not immediately reflect these future expenses. Especially since certain groups in the sector already display well-tense production capacities,” he adds.

Aymeric Diday, director of management of Pergam, also shows himself skeptical. “The defense sector we will weigh it in the wallets but we will not be overcoming it at these levels there. We tend to alleviate the positions today,” he explained Tuesday in News Bulletin 247e.

“The market is today ‘praised’ to perfection on these values,” he added. In other words, all of the potential is already reflected in the courses, according to him. “It is not because we have orders of orders that are full that we have valuations that explode upwards”, especially since “orders it cancels,” said the manager.

Optimistic Goldman Sachs

Goldman Sachs is more optimistic. In a note published last week, the strategists of the American bank continued to recommend themselves on European defense actions.

The American establishment has also nuanced the question of valuation. Goldman Sachs notes that the consensus (analysts’ average forecasts) table, for the period 2024-2027, on an average annual growth in action by European defense groups of 29%, against 11% for their American rivals.

By integrating these growth prospects, European groups are still exchanging with a stock market discount of 16% compared to American defense companies, while this discount was close to zero in 2019-2020, analyzed Goldman Sachs. In other words, European defense is not so expensive on the stock market.

Oddo BHF also thinks that the sector still has potential. If the market has understood that the defense enters a new era, “we believe that the latter (the market, editor’s note) underestimates the extent of the impact on companies in the sector: we are entering a powerful multi-year growth cycle”, predicts the design office.

The broker considers that military budgets could increase by 160 billion euros if Europeans reach 3% of GDP, judges that the European Union could itself have its own budget which would amount to around 50 billion euros (against around 2 billion euros today), and estimates that European companies should reconquer lost market share for the benefit of importers 2030 against 24% at present.

What values ​​can be distinguished?

Above all, Oddo BHF underlined, in its note published in early March, that the growth of the potential market for European defense groups could reach 31.5% per year over the period 2024-2030. The broker previously tapped on an average annual increase of 10.5%.

Oddo BHF had then revalued, on average, by 42% its targets on European actions for the defense of its coverage.

We “believe that an appreciation of the prices of an additional 20% is at hand,” wrote the design office.

Oddo, however, is more optimistic about Thales, Exosens, Esseil Technologies and Hensoldt (all four advised to “outperformance”) than for Dassault Aviation, Leonardo and Rheinmetall (“neutral”). The broker is even “underperformance” on BAE Systems due to uncertainties on the American military budget, the British group generating 48% of its revenues in the United States.

“The defense sector, in my opinion, has not yet finished progressing. However, the trajectory will probably not be linear and one cannot exclude ‘jerks’ or even short-term turbulence on these titles”, judges for its part Grégoire Laverne, managing international actions at APICIL AM.

“But, despite valuations currently high for most of the sector’s actions, there is still a significant potential. Our economies are changing. Without completely switching to a war economy, the need to strengthen our defense capacities is now recognized, resulting in an increase in military budgets, especially in Europe, with a political desire to promote the companies of the Old Continent”, he develops.

“Obviously we are still in the time of politics and the bulk of orders will rather materialize at the end of the decade. Nevertheless, new political ads and, above all, their realization in effective orders could stimulate the feeling of the market in the years to come,” explains the manager.

In terms of values, Grégoire Laverne issues some recommendations. “Rheinmetall remains, despite his career, a must. To a lesser extent, we also appreciate the British Bae Systems and the Norwegian Kongsberg Grupun. In France we prefer Thales to Dassault Aviation”, explains Grégoire Laverne. The manager specifies having all of these values ​​in the portfolio

except Dassault Aviation.