While American investors focused on AI stocks and the Magnificent Seven, a parallel revolution was unfolding across the Atlantic. European defense stocks posted their best year on record, with Germany's Rheinmetall emerging as one of the most profitable investments anywhere in global markets.

A Year of Unprecedented Gains

The STOXX Europe Aerospace and Defense index surged more than 65% in 2025, with several regional defense players more than doubling in value. But the standout performer was Rheinmetall, the Düsseldorf-based manufacturer of military tanks and ammunition.

Rheinmetall's stock jumped 164% this year in European trading, while its American Depositary Receipts performed even better, more than tripling in value. Since Russia invaded Ukraine in 2022, the company's shares have increased more than 12-fold—a return that would make even the most aggressive growth investors envious.

Germany Leads the Spending Surge

The catalyst for this historic rally was a fundamental shift in European defense policy. German lawmakers approved a record €52 billion (approximately $61 billion) in military contracts, marking one of the country's most significant commitments to defense procurement in decades.

This represented a dramatic departure for Germany, which had historically maintained relatively modest military spending. The country reformed historic legislation to pave the way for increased security spending, effectively ending decades of post-World War II reluctance to build a large military-industrial complex.

"We are witnessing the most significant rearmament of Europe since the Cold War. The companies positioned to fulfill these contracts are experiencing once-in-a-generation demand."

— Morgan Stanley defense sector analysts

NATO's 5% GDP Target Changes Everything

Earlier this year, NATO allies agreed to increase defense spending to 5% of gross domestic product by 2035, up from a previous target of 2%. This single policy shift has created a decade-long tailwind for defense contractors that analysts say is still in its early stages.

Morgan Stanley's defense analysts named Rheinmetall as their top pick heading into 2026, projecting the stock could surge another 50% over the next 12 months. The bank's assessment: Europe's defense rally is just beginning.

The Order Book Tells the Story

Rheinmetall's financial metrics reveal the scale of the transformation underway:

  • Order backlog reached €64 billion at the end of Q3 2025
  • This represents a fivefold increase from €12.9 billion at the end of 2020
  • Defense business sales rose 28% in the first nine months of 2025
  • Management projects sales of €50 billion by 2030, up from €10 billion in 2024

These aren't incremental improvements—they represent a complete restructuring of the company's growth trajectory.

Beyond Rheinmetall: The Broader Defense Rally

While Rheinmetall captured the headlines, other European defense stocks also posted exceptional returns:

  • Saab (Sweden) benefited from increased Nordic defense cooperation and export orders
  • BAE Systems (UK) continued its expansion in both European and American markets
  • Leonardo (Italy) secured major contracts for helicopters and aerospace systems
  • Thales (France) capitalized on demand for radar and communications systems

The Investment Case for 2026

For American investors, European defense stocks present both opportunity and complexity. The sector is accessible through ADRs and ETFs focused on global aerospace and defense, but currency fluctuations and geopolitical risks require careful consideration.

The fundamental case, however, remains compelling. Defense spending increases are locked in through long-term NATO commitments. Order backlogs provide visibility stretching years into the future. And unlike consumer-facing companies, defense contractors face no near-term demand destruction risk.

What Could Go Wrong?

The primary risk to the thesis would be a sudden de-escalation of global tensions that leads governments to scale back spending commitments. However, with conflicts ongoing in Ukraine and the Middle East, and tensions elevated in the Taiwan Strait, such a scenario appears unlikely in the near term.

There's also the risk that the historic 2025 gains have already priced in much of the good news. Investors considering entry at current levels should be prepared for higher volatility than the sector experienced during its climb.

Still, for those who believe that the world is entering a new era of elevated defense spending, European military contractors offer exposure to one of the clearest multi-year growth trends in global markets.