European defense stocks soared in the first quarter, with the STOXX 600 index outperforming the US stocks to reach an all-time high.

In the first quarter of this year, the performance of the European defense sector in the stock market reached a historic new high. The Stoxx 600 Index, when priced in US dollars, achieved the best performance in history relative to the S&P 500 Index. Behind this capital frenzy is the dual drive of geopolitical games and a surge in military demand. Armor vehicle manufacturer Rheinmetall AG and Thyssenkrupp AG, which owns submarine business, both doubled their stock prices in the first quarter. These two companies, which are components of the Stoxx 600 Index, achieved such results. The next six best-performing companies are also expected to benefit from the surge in defense spending in various European countries, as the US security commitment to continental Europe faces threats of possible withdrawal. The rebound in stock prices this time is a major reason for the outstanding performance of the European stock market. In US dollars, the Stoxx 600 Index in this region achieved its best quarterly performance relative to the S&P 500 Index in history. A basket of pure European defense stocks from Goldman Sachs rose a record 70% during this period. Companies such as Thyssenkrupp and Iveco Group NV also saw their stock prices rise due to speculation about the sale and listing of their defense sectors. The explosive growth in European defense spending is widely believed to be the core drive. The UK plans to increase defense spending as a percentage of GDP from 2.3% to 2.5% by 2027, while Germany is considering a special defense fund at the billion-euro level. The Trump administration is continuously pressuring Europe to take on more security responsibilities, and this "strategic weaning" is expected to directly detonate the revaluation of defense stocks. Bulls like Vera Diehl from Union Investment straightforwardly said, "This is the golden track for the next decade", and their portfolio has fully invested in the defense sector. However, there are also cautious voices, such as Charlotte Ryland, Investment Director of CCLA Investment Management, who warned, "Historical returns are insufficient to support current P/E ratios" and advised waiting for performance realization. It is worth noting that some investors have shown signs of blindly chasing highs. Currently, the expected P/E ratios of many defense stocks exceed that of luxury goods and technology stocks. The P/E ratios of Rheinmetall, Saab AB, and Kongsberg Gruppen ASA are about 40 times. Leonardo Spa has a relatively lower P/E ratio of about 24 times. Alec Cutler, portfolio manager at Orbis Investments based in Bermuda, revealed that the market is full of hype for microcap stocks related to defense businesses that require a magnifying glass to spot. In March, a team led by Morgan Stanley strategist Marina Zavolock surveyed over 100 European defense investors. The survey results showed consistency in their overall recommendation to increase holdings. However, due to the gradual relaxation of investment restrictions related to environmental, social, and corporate governance (ESG), and the gradual recognition and acceptance of the defense industry by a wider range of comprehensive investors, the current position of investors in the defense sector remains relatively low. Nevertheless, bullish investors remain undeterred. Patrick Armstrong, Chief Investment Officer of Plurimi Wealth LLP, said, "Our system favors all European defenses." The company uses artificial intelligence and machine learning to select stocks. He added that valuations may be stretched, but "German and EU policies will drive revenue growth, thereby exceeding expectations." Against the backdrop of accelerated penetration of AI technology, the militarization of defense has become a new narrative. From autonomous decision-making equipment to unmanned combat systems, technological upgrades are expected to further elevate the sector's imagination. This wave of defense investment sweeping across Europe is not only a capital reflection of the evolution of geopolitical chess games but also a resonant product of technological revolution and strategic anxiety. For investors, finding a balance between high valuations and high growth expectations may be more crucial than betting on a direction.