While the ‘Magnificent Seven’ group of shares slumps, defence stocks continue to boom as the new global arms race heats up.
Since the start of 2025, a basket of seven of Europe’s leading defence shares — BAE Systems, Dassault Aviation, Leonardo, Rheinmetall, Rolls-Royce, Safran, and Thales — have risen 46% in value. That’s according to research from eToro.
By comparison, the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) has fallen 8% since 1 January.
But this outperformance is no recent development. In the current political and economic landscape, could now be the time for investors to consider prioritising defence shares?
Sustained outperformance
| 1 year | 3 years | 5 years | |
| US Magnificent Seven | 21% | 66% | 227% |
| European Defence Seven | 65% | 245% | 268% |
| S&P 500 | 13% | 39% | 99% |
| STOXX 600 | 11% | 31% | 50% |
Since Russia’s invasion of Ukraine in early 2022, this basket of European defence shares has eclipsed the performance of large-cap US tech stocks.
As the table shows, it’s also provided a return six times larger than the S&P 500 has delivered over that time.
A prolonged ramp up in European defence budgets has fuelled these gains. Spending is tipped to accelerate too as military support from the US recedes.
eToro analyst Lale Akoner notes that “along with persistent geopolitical tensions, these conditions have created a perfect storm for Europe’s defence sector, as the region will now be more reliant on its own contractors”.
A top defence stock
To answer my first question, then, I think buying European defence stocks could be a great strategy to consider.
There are risks here, such as supply chain issues that may be worsened by upcoming trade tariffs. Reduced US defence spending may also substantially impact companies with large exposure to Department of Defense budgets.
But I think the evolving geopolitical landscape means European contractors look in good shape to continue surging.
QinetiQ (LSE:QQ.) is one company that’s recently caught my eye. It sources around 66% of revenues from the UK, and around 10-15% more from non-US countries. This leaves it less exposed to a possible fall in DoD spending than some other London stocks.
The FTSE 250 company provides a wide range of services across land, air, sea, and even cyberspace. It clocked up £1.3bn of orders in the nine months to December, and is predicting £2.4bn of organic revenue and a 12% operating margin by 2027.
That compares with sales of £1.9bn and margin of 11.3% last year.
QinetiQ’s share price has spiked in recent weeks amid the broader surge in defence shares. Yet with a forward price-to-earnings (P/E) ratio of 14.1 times, it’s far cheaper than many other European defence shares today (BAE Systems and Rolls-Royce, for instance, trade on multiples of 20.8 times and 35 times respectively).
This could give QinetiQ further scope to rise than its industry peers.
A sound strategy
I think increasing one’s exposure to the defence sector could be a sound strategy right now. As part of a diversified portfolio these companies could help share pickers to enjoy robust returns.
Remember, though, that past performance is no guarantee of future profits. This is why maintaining a balanced mix of shares across industries and regions remains critical for long-term investors.
This post was originally published on Motley Fool
