Important security note: Warning of attempted fraud in the name of DWS
We have detected that fraudulent individuals are misusing the "DWS" trademark and the names of DWS employees on the internet and social media. These fraudsters are operating fake websites, Facebook pages, WhatsApp groups and Mobile Apps. Please be aware that DWS does not have any Facebook Ambassador profiles or WhatsApp chats. If you receive any unexpected calls, messages, or emails claiming to be from DWS, exercise caution and do not make any payments or disclose personal information. We encourage you to report any suspicious activity to info@dws.com, including any relevant documents and the original fraudulent email. Additionally, if you believe you have been a victim of fraud, please notify your local authorities and take steps to protect yourself.
10 Themes - #6: Europe's rearmament is a project for decades
27/10/2025
Europe's limited defense capabilities may remain so for some time. This is not a comforting realization, but it means funds could be flowing into the defense sector for a long time.
A more than 500% price increase in the index[1]
The state of the European military can be summarized in appropriate staccato: Since the fall of the Iron Curtain there have been 30 years of underinvestment. Europe left defense to the Americans. The attack on Ukraine and clear signals from the White House that Europe must defend itself have changed that. Russian drones on European NATO territory are a further spur. A major political rethink has taken place. Defense budgets are rising sharply, especially in Germany, Northern and Eastern Europe. The budget difficulties faced by France, Spain, and Italy make progress slower. Further, military production capacities cannot be created overnight.
And so there may be some near-term disappointment on the march to stronger European defense. But we are convinced that European rearmament represents a structural change that may provide the sector with a strong tailwind for many years to come. Investors now may wish to evaluate which defense stocks they buy, however. Madeleine Ronner, Senior Equity Portfolio Manager at DWS, comments: “One year ago you could buy practically anything related to defense and beat the market. Now, you have to be much more selective. And, even then, the valuations of our favorite stocks look quite challenging. However, given the current growth outlook, they may be able to grow into these valuations.”
Europe’s defense sector relative to the market*
*Bloomberg Europe Defense Index relative to Stoxx Europe 600
**Price-to-earnings ratio(P/E)
Sources: DWS Investm. GmbH; Bloomberg Finance L.P. 10/17/25.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypo-thetical models that may prove to be incorrect. Alternative investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable for all clients. Source: DWS Investment GmbH.
The chart shows this dynamic. The defense sector has performed significantly better than the overall market over the past five years, building since 2021 a steadily rising valuation premium. Measured by earnings over the past twelve months, it is now twice as expensive as the overall market. At its peak, however, in July this year, it was three times as expensive.
We think, however, that the sector’s appeal, remains strong. It might offer:
- Long-term, relatively predictable, government-financed revenues.
- High economies of scale through capacity expansion with high operational leverage due to high fixed costs.
- Potentially higher expected profit growth for several years. If the sector is valued based on assumed profits over the next three to five years, its valuation premium quickly melts away again.
These forecasts are based on the following assumptions: Europe's defense spending will rise from the current 2% of gross domestic product (GDP) to 3% by 2030,[2]
As the war in Ukraine shows, warfare technology and tactics are changing rapidly. This calls for a selective approach, as not all companies are equally prepared for this challenge. It also requires considering the entire value chain and related industries, such as aircraft and cybersecurity. Nevertheless, we believe that the defense sector is likely to remain buoyant as long as Europe doesn’t feel safe.
CIO Special_Theme 6 - Europe's rearmament is a project for decades
Miscellaneous