Defence stocks propel DAX 40 and STOXX 600 to new highs

European stocks continue their upward trajectory as risk appetite returns to equity markets. Both the DAX 40 and the STOXX 600 have reached new all-time highs at the start of this week, driven by optimism on the geopolitical front. One major factor contributing to this rally is the perceived de-escalation of trade tensions. Former President Trump’s previously aggressive tariff stance appears to have softened, with the delay in implementation signalling a more strategic rather than combative approach. Markets, having previously braced for a worst-case scenario, are now pricing in a more measured trade environment, thus bolstering risk sentiment in global equities.

Meanwhile, developments in Eastern Europe have also alleviated some investor concerns. Trump recently announced that peace talks with Russia would commence “immediately” to end the war in Ukraine. However, the exclusion of both Ukraine and the European Union from these discussions has sparked criticism, straining transatlantic relations. The EU, caught off guard, is now scrambling to formulate a cohesive defence strategy in an effort to maintain influence in these crucial negotiations.

One of the key takeaways from the Munich Security Conference over the weekend was the renewed focus on increasing military spending within NATO, particularly among European nations. This policy shift has significantly benefited European defence stocks, which have rallied sharply since Trump’s inauguration in mid-January.

Past performance is not a reliable indicator of future results.

Defence and Aerospace Lead the Charge

The defence and aerospace sectors have emerged as primary drivers behind the recent rally in the STOXX 600, propelling the index to successive record highs over the past four weeks. On Monday, shares of German arms manufacturer Rheinmetall and Swedish aerospace and defence company SAAB AB surged as much as 11%, followed closely by gains in France’s Thales and Italy’s Leonardo.

While some profit-taking from Monday’s highs has occurred—an expected outcome following such significant gains—the pullback has remained contained. Both the STOXX 600 and DAX 40 exhibited a slightly bearish tilt at the start of the European session on Tuesday. However, despite reaching overbought territory on the Relative Strength Index (RSI), selling pressure has so far been insufficient to break the bullish momentum. This suggests that while a correction could be on the horizon, the prevailing uptrend remains intact in the short term.

DAX 40 daily chart

Past performance is not a reliable indicator of future results.

Market Outlook and Risks

Trump’s approach to these peace talks has fuelled expectations of increased military spending in Europe, further supporting defence stocks. However, his exclusion of key stakeholders—namely the EU and Ukraine—poses risks to NATO unity and broader transatlantic relations. Even if a resolution in Eastern Europe is achieved, lingering geopolitical tensions may persist, influencing market dynamics.

At this stage, the likelihood of a conclusive peace agreement remains low. Nevertheless, European defence stocks appear poised to continue their upward trend throughout the year. The EU has seemingly recognized the necessity of a unified defence strategy, which entails increased military spending—despite internal divisions on the matter.