Defence stocks have surged as investors expect governments across Europe to ramp up spending following recent developments in geopolitical tensions.
A rally in UK defence stocks on Monday helped propel the FTSE 100 (^FTSE) to a record high close of 8,904 points.
This came following a fiery exchange between US president Donald Trump and Ukrainian president Volodymyr Zelensky at a meeting in the White House on Friday.
European leaders then assembled in London on Sunday for emergency talks on finding a way forward to help end the Russia-Ukraine war. UK prime minister Keir Starmer said Europe must act to support Ukraine, and that the UK and France would lead a "coalition of the willing" to secure peace.
The summit saw European leaders agree to boost defence spending. Starmer had already set out plans last week to increase the UK's spending on defence to 2.5% of gross domestic product (GDP) by 2027, up from its current level of 2.3%, with the target of reaching 3% in the next parliament.
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Late on Monday, the White House then announced that the US would pause its military aid to Ukraine to support its continued fight against Russia's invasion. This heightened expectations that Europe could end up shouldering more of the responsibility for its own security.
Meanwhile, Ursula von der Leyen, president of the European Commission, unveiled the ReArm Europe plan on Tuesday, saying in an announcement that this could "mobilise close to €800bn (£667bn) for a safe and resilient Europe".
Later on Tuesday, Trump appeared to soften his tone towards Zelensky in a speech in Congress, after receiving a letter from the Ukrainian leader. Trump quoted Zelensky as writing that Ukraine was "ready to come to the negotiating table as soon as possible to bring lasting peace closer."
While this eased geopolitical fears, a number of defence stocks were still rising on Wednesday morning. And even before these latest developments, investors were already anticipating more spending in defence, buying into stocks in the sector.
Here's which defence stocks investors have been buying, as well as those that are highly-rated by analysts.
FTSE 100 (^FTSE) aerospace and defence company Rolls-Royce Holdings (RR.L) was the fourth most bought stock on Interactive Investor's platform in February.
Richard Hunter, head of markets at Interactive Investor, said that the stock had been a mainstay of the platform's popular investments list for some time.
Shares in Rolls-Royce (RR.L) soared last week after it reinstated its dividend and announced a £1bn ($1.28bn) share buyback alongside its full-year results, with this week's sector-wide surge propelling the stock to fresh highs.
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In the results, Rolls-Royce (RR.L) said underlying revenue had reached £17.8bn in 2024, up from £15.4bn in 2023. Underlying operating profit for the year rose to £2.46bn from £1.59bn in 2023.
For 2025, the company guided to underlying operating profit of between £2.7bn and £2.9bn, and upgraded its mid-term target to between £3.6bn and £3.9bn.
"Nor does the group see that as the end game, describing the new targets as a milestone rather than a destination," said Hunter. "This extraordinary corporate turnaround has resulted in a gain of 429% since the CEO [Tufan Erginbilgiç's] appointment two years ago. In the last year alone, the price has risen by 111%, and the market consensus of the shares as a 'buy' suggests that appetite remains undiminished."
Bank of America (BAC) and Deutsche Bank (DBK.DE) have reiterated "buy" ratings on the stock over the past week.
BAE Systems (BA.L) also reached a fresh high this week, hitting £16.64 per share on on Monday.
The stock entered Interactive Investor's most bought equities list for the first time in February, as well as featuring among AJ Bell's (AJB.L) most popular stocks with DIY investors last month.
In its recent full-year results, BAE (BA.L) reported a 14% increase in sales in 2024 to £28.3bn, as well as a 14% rise in underlying earnings before interest and tax to £3.02bn.
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In addition, BAE (BA.L) reported a record backlog of orders of £77.8bn, which was up 11% on the previous year.
"The group also projected further gains in adjusted profit this year of over 10%, while the previous £4.4bn purchase of US company Ball Aerospace widened its product portfolio in the space sector," said Hunter.
BAE (BA.L) raised its dividend 10% for the year to 33p per share, which Hunter pointed out marked its 18th consecutive year of payout increases.
On the back of BAE's (BA.L) recent results, Deutsche Bank (DBK.DE) reiterated a "buy" rating on the stock. Analyst Christophe Menard said the results came in ahead of consensus on metrics including sales and earnings per share, while the company's guidance for the year was broadly in line with expectations.
German technology group Rheinmetall (RHM.DE), which supplies systems in the defence industry, is another name that was among AJ Bell's most popular stocks with DIY investors in February.
The stock shot up to a record high share price of €1,199 on Monday and is up 82% year-to-date.
Deutsche Bank reiterated a "buy" rating on the stock in a note on 24 February, with the stock having rallied on the back of the Munich Security Conference.
Deutsche Bank analyst Christoph Laskawi said: "With the shares moving up materially since then, a decent portion of additional defence spend across Europe is already priced in.
"However, we see further upside potential on momentum and the company providing more detailed analysis on which systems are most needed in Europe and what Rheinmetall (RHM.DE) can provide to support."
FTSE 250 (^FTMC) firm QinetiQ (QQ.L) was another popular stock for AJ Bell's DIY investors last month, with the latest rally in shares seeing the stock trade near record highs.
QinetiQ (QQ.L) is a high-tech defence technology company, which was spun out of the UK's Ministry of Defence.
In a third quarter trading update in January, QinetiQ (QQ.L) said it expected to continue to deliver high-single digit organic revenue growth for the full year and mid-term organic revenue of £2.4bn, with a profit margin of around 12%, by 2027.
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On the back of this update, Deutsche Bank (DBK.DE) reiterated its "buy" rating on the stock, while Barclays said its "overweight" rating on QinetiQ (QQ.L) remained unchanged.
In a comment released last week, Matt Dorset, equity analyst at Quilter Cheviot, highlighted that 66% of QinetiQ’s (QQ.L) sales are in the UK and that the business is "closely connected to the research and services of the Ministry of Defence, having previously been state owned."
"This puts the business in a strong position to benefit from increased investment in defence spending," he said. "QinetiQ (QQ.L) is exposed to faster growing areas of defence spending including research and development and testing and evaluation, which should be bolstered by additional spending commitments."
While US data analytics software maker Palantir (PLTR) has seen a pullback recently, Barron's reported on Monday that Wedbush Securities said this represented an "opportunity".
Palantir (PLTR) shares slumped after the Trump administration announced plans to reduce defence spending, given the sector forms a key part of the company's business.
However, Barron's reported that Wedbush analysts believed Palantir could weather planned defence budget cuts.
Palantir (PLTR) was the fifth most bought stock on Interactive Investor's platform in February. The company's shares soared earlier last month, after its fourth quarter earnings came in ahead of estimates. Revenue of $827.5m (£645.1m) beat expectations of $775.9m, while adjusted earnings per share of $0.14 was above estimates of $0.11.
NasdaqGS - Delayed Quote • USD While the latest geopolitical developments have raised hopes for a peace deal for Ukraine, uncertainty still remains. Even before the events of recent days, politicians in Europe had signalled plans to increase defence spending, which investors expect to provide a boost to the sector.
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