Military Budget Expansion Ignites Global Defense Rally as European Shares Lead Charge

Geopolitical Tensions Fuel Worldwide Defense Stock Boom

The defense sector is witnessing a spectacular bull run as President Trump signals intentions to dramatically boost US military expenditure. This year’s escalating tensions—from recent military activity in Venezuela to discussions about potential military actions in Greenland—have created a powerful catalyst for investor appetite in defense equities globally.

On Wednesday, Trump announced a push for an additional $500 billion in annual defense funding, sending immediate shockwaves through trading floors worldwide. The policy shift has reignited confidence in companies serving the US military-industrial complex and their international counterparts.

European Shares Dominate the Upside

European shares within the defense sector have emerged as clear winners, with a Goldman Sachs-compiled European defense index surging 3.8% in a single session, accumulating nearly 13% gains across the week. This exceptional performance underscores growing investor conviction that geopolitical uncertainty will sustain elevated defense budgets across the Atlantic.

UK defense giant BAE Systems led European momentum, with shares climbing as much as 7%. The company’s exposure to American defense contracts—generating close to half its annual revenue from US operations—positions it as a prime beneficiary of expanded military spending. Germany’s Rheinmetall AG captured 4.1% gains, hitting its strongest valuation since October as European defense capabilities gain strategic importance.

US Defense Giants Stage Recovery

Stateside, major contractors bounced back decisively. Northrop Grumman and Lockheed Martin surged over 6% in premarket action, reversing recent losses stemming from Trump’s executive orders restricting executive pay and shareholder distributions within defense firms.

The White House directive requires significant defense contractors to suspend stock buybacks and dividend payments while capping executive compensation at $5 million annually—until they substantially escalate capital deployment toward manufacturing and research acceleration.

Asia Joins the Defense Rally

The geopolitical momentum extended eastward, where South Korea’s Hanwha Aerospace, Taiwan’s Aerospace Industrial Development, and Japan’s Howa Machinery all participated in defense sector appreciation, reflecting broader recognition that military modernization spending will remain elevated globally.

Capital Constraints May Prove Manageable

While restrictions on capital returns impose near-term constraints, analyst perspectives suggest manageable consequences. Morgan Stanley’s Kristine Liwag noted that reduced dividend and buyback commitments could paradoxically accelerate corporate expansion and production capacity increases—redirecting capital toward organic growth rather than shareholder extraction.

This dynamic creates an unusual market narrative: policy restrictions intended as corrective measures may actually channel resources more productively toward defense sector growth objectives as tension levels remain elevated throughout 2026.