European Defense: Getting to 3.5% of GDP - A snapshot of NATO's military budgets

The European Defense investment cycle remains one of the most visible themes globally, in our view. As fiscal power and proximity with Russia drive a widening gap in military spending across Europe, we update our military budget forecasts. European defense budgets will reach 2.6% of GDP in 2026, or $730bn, a +20% increase vs. 2025. Germany, the UK, France and Italy account for more than half of the European budget. The addressable market should grow at a +12% CAGR until 2030, and +9% until 2035; we do not believe that the 3.5% target will be reached in 2035, modeling an average of 3.2% in 2035. The share of budgets allocated to equipment should reach 38% in 2035, vs. 34% in 2026 and 29% in 2024, and local European players should capture most of the incremental opportunity. Germany is the most attractive market, with Rheinmetall the key beneficiary. The US will spend $1tr in defense in 2026, implying 3.2% of GDP. We rate Leonardo, Rheinmetall, TKMS and Thales as Outperform, and BAE Syst