Europe's €800 Billion Rearmament: Why International Equities Deserve a Second Look

The Scale of the Shift

European military budgets rose 13% in real terms in 2025, reaching $563 billion collectively. Germany alone has doubled its defense budget since 2021 to $107 billion, with plans to reach $137 billion in 2026. Poland is spending 4.7% of GDP on defense — more than double the NATO 2% target.

But the numbers tell only part of the story. The European Union has announced a coordinated rearmament plan aiming to mobilize up to €800 billion in additional defense spending by 2030, with a potential trajectory reaching €1 trillion by 2035 if all NATO members hit the new 3.5% GDP target.

This is not a cyclical spending increase. It is a structural transformation of European industrial policy — the kind of multi-decade shift that reshapes capital markets.

Why This Is Not Just a Defense Story

The temptation is to view the rearmament through a narrow lens: buy defense stocks (Rheinmetall, BAE Systems, Leonardo) and ignore the broader implications. But the multiplier effects of sustained defense spending extend across the European economy:

Industrial Capacity

Defense manufacturing requires steel, advanced materials, precision engineering, and electronics. European industrial companies that supply these inputs — many of which have languished during the era of peace dividends — are experiencing renewed demand. Order backlogs for major defense contractors now extend years into the future, providing revenue visibility that most sectors cannot match.

Technology and Cybersecurity

Modern defense spending increasingly flows into digital capabilities: AI-integrated systems, space-based assets, and cybersecurity infrastructure. This is creating a European defense-tech ecosystem that competes with — and sometimes partners with — US defense primes.

Energy Independence

The Iran conflict and Strait of Hormuz disruption have intensified Europe's urgency to reduce energy dependence on geopolitically sensitive supply chains. Defense spending is accelerating investment in energy security: nuclear power, LNG infrastructure, and renewable generation capacity.

Fiscal Stimulus

€800 billion in defense spending is, in macroeconomic terms, a massive fiscal stimulus program. Unlike consumer-focused stimulus (which tends to be short-lived), defense procurement cycles span decades — providing sustained demand for manufacturing, R&D, and infrastructure.

The Dollar Weakness Amplifier

Our GPS framework has consistently identified dollar weakness as a secular trend. The European rearmament reinforces this thesis from multiple angles:

Capital flows are shifting. Euro area-domiciled investment funds are attracting more inflows for Western European assets compared to US assets. Since December 2025, euro area equities have outperformed the S&P 500 — a reversal of a decade-long trend.

Fiscal divergence. European governments are directing spending into productive industrial capacity (defense manufacturing, infrastructure). The US fiscal trajectory, by contrast, is dominated by transfer payments and debt service. Over time, this divergence favors the euro and non-dollar currencies.

Relative valuation. European equities trade at approximately 14x forward earnings versus 20x for the S&P 500. Even after the recent defense rally, the valuation gap remains historically wide. For a portfolio currently underweight international equities, the entry point is attractive.

How to Think About Allocation

Beyond Defense Stocks

Pure-play European defense contractors (Rheinmetall, BAE, Leonardo, Thales, Saab) have rallied sharply — Rheinmetall's stock has increased fivefold since 2022. At current valuations, the easy money has been made in the direct beneficiaries. The more compelling opportunity may be in the supply chain and second-order beneficiaries: industrial conglomerates, energy infrastructure companies, and technology firms that provide capabilities to the defense sector without carrying defense-specific regulatory risk.

Broad European Equity Exposure

For most UHNW portfolios, the appropriate response is not to build a concentrated defense portfolio, but to increase broad international equity exposure (EFA, VGK). The rearmament cycle provides a structural demand floor for European equities as a whole, while the valuation discount and dollar weakness provide additional tailwinds.

Currency Considerations

For US-based investors, European equity exposure involves currency risk. A weakening dollar enhances returns when European stocks are translated back to USD. If our secular dollar-weakness thesis is correct, unhedged European equity exposure provides both the equity return and the currency return.

For investors who want the equity exposure without the currency bet, hedged international equity funds are available — though they sacrifice the potential currency tailwind.

Our Perspective

At Altar Rock, the European rearmament cycle reinforces two of our core convictions: that dollar weakness is secular, and that the most compelling forward-looking opportunities lie outside the narrow band of US large-cap equities that has dominated returns for the past decade.

The families who will benefit most from this structural shift are those who are willing to look beyond the S&P 500 and recognize that the global investment opportunity set has fundamentally changed. Europe is no longer the "value trap" narrative of the 2010s. It is an economy undergoing the largest sustained industrial investment since the Marshall Plan.

For portfolios with minimal international equity exposure — which describes many US-based UHNW families — the case for rebalancing has strengthened materially.