Investing.com — Europe’s defense sector is expected to maintain its valuation premium over the broader market through 2025, buoyed by rising military spending pressures driven by geopolitical factors, particularly influence of former US President Donald Trump.

Analysts at BofA Securities indicated that Trump’s call for NATO members to increase defense spending by 5% of GDP.

According to BofA Securities, NATO’s focus on strengthening air defense capabilities, offensive weapons systems, and nuclear deterrents, coupled with increased budget commitments, underpins a favorable outlook for the European defense firms.

Recent moves by the alliance to raise spending targets to 3% of GDP, along with Trump’s push for stronger commitments, signal a shift that is likely to continue higher valuations for the industry.

The increased spending needs come amid a backdrop of rising geopolitical tensions, particularly in Eastern Europe and the Arctic regions.

Currently, European defense companies are trading at a modest premium to their US counterparts, a shift from historical norms when they have typically lagged behind. Analysts attribute this change to an improved growth trajectory and the increasing recognition of Europe’s important role in the global security dynamic.

Higher valuations reflect optimism about the sector’s potential earnings and its ability to take advantage of expanding budgets in NATO countries.

In addition, the emergence of new defense technology companies is changing the competitive landscape on both sides of the Atlantic. Companies such as Helsing in Europe and Anduril in the US are increasingly challenging traditional defense contractors with new offerings, such as drone swarm technologies and precision munitions systems.

BofA analysts flagged this trend as an important dimension of the future dynamics of the industry, with new entrants injecting new momentum into the sector.

Overall, the combination of geopolitical pressures, policy changes within NATO, and disruptive technological advances set a supportive stage for the European defense industry.

BofA Securities projects that strong premium valuations in the sector will continue through 2025, supported by both strategic imperatives and market confidence in the industry’s stability and adaptability.