The French economic daily Les Echos, on Aug. 20, has a quite revealing title: “Ukraine, Gaza: The Prospect of a Cessation of Fighting Derails Defense Stocks on the Stock Market,” with the subtitle: “The prospect of an end to the war in Ukraine, outlined on Monday in Washington by the American President, as well as that of a ceasefire in Gaza, have caused European arms stocks to decline.”
“While the pan-European STOXX 600 index nibbled away at 0.75% on Tuesday [Aug. 19], the SXPARO index of European defense stocks lost almost 3%, its biggest one-day drop since early July,” notes the article. Shares of individual companies, however, dropped much more. Italian defense company Leonardo and German company Hensoldt fell 10.1% and 9.5%, respectively. German defense group Rheinmetall and tank component manufacturer Renk also fell 4.9% and 8.2%, respectively.
War profiteering is undoubtedly the real motive of Europe’s Coalition of the Willing. On Aug. 7, Le Monde noted: “Investors, who had long remained distant from the defense sector, were unable to resist the budgetary allocations announced since the beginning of the year: The €800 billion ‘ReArm Europe’ plan, the €500 million German infrastructure program, and the agreement by NATO members to increase their defense budgets to 3.5% by 2035, not to mention an additional 1.5% for infrastructure.
“Stocks have soared on the stock market. As of Aug. 5, shares in German combat equipment and armored vehicle manufacturer Rheinmetall have risen 188% since Jan. 1. Fellow German company Hensoldt has gained 172%, Italy’s Leonardo 85%, and France’s Exosens and Thales 121% and 71% respectively….
“The rush was massive: €8.7 billion poured into collective management funds labeled ‘defense’ during the first seven months of the year, according to data provider Morningstar. ETFs (Exchange Traded Funds, index funds also called ‘trackers’) monopolized the inflows and now represent nearly €12 billion of a total outstanding amount of €12.9 billion in Europe (as of the end of July).”
Le Monde points to the fact that Exchange Traded Funds (ETFs) could be a “double-edged sword.” Days before the Alaska summit, observers noticed a pause which they fear could signal “the end of the party.” In short, the “defense bubble” could pop, since “the scale of the movement in these products reflects herd-like, not to say speculative, behavior.”
Valuations have reached stratospheric heights. “Among the top 10 listed European companies, Hensoldt is trading at 120 times the 2025 earnings estimates, Rheinmetall at 95 times, Sweden’s Saab at 55 times, and France’s Thales and Safran at 47 and 28 times, respectively. But profits will still have to live up to expectations, and peace, of course, is bad news.”
