European and Asian defense stocks have rallied this year. A lack of trust in the U.S. could be driving those gains

A quote from the 2008 TV series “Star Wars: The Clone Wars” goes: “Wars are not won with superior weapons, but with superior strategy.”

However, the strategy now in the markets, it seems, is investing in weapons — specifically, by makers that are not based in the United States.

Following the Trump administration’s rattling of long-held global alliances, countries have poured money into their own defense budgets, sending defense stocks higher.

The rising tide of increased defense spending typically lifts all arms stocks, however European and Asian defense stocks have been outperforming their U.S. counterparts.

While stocks have generally sold off after U.S. President Donald Trump announced his plan for “reciprocal tariffs”, European and Asian arms manufacturers are still posting respectable gains on a year-to-date basis, with some rising over 100%.

Veteran investor and strategist at Quantum Strategy David Roche told CNBC the rise in defense stocks outside of the U.S is due to the reduction in trust of the U.S. as an ally.

He pointed out that U.S. President Donald Trump’s realignment with Russia in the Russian-Ukraine war, as well as his “betrayal” of Ukraine President Volodymyr Zelenskyy led some countries to assess that they can no longer rely on the U.S.

Roche’s view is echoed by Trevor Taylor, director of the Defence, Industries & Society Programme at the Royal United Services Institute, a U.K. based think tank.

Taylor explained that historically, European governments have often been inclined to buy from the U.S. because it reinforced the perception that the world’s largest economy would “feel better about carrying the responsibilities that it did as an ally.

“[Now] that the United States does not seem to want to carry the responsibilities that it has as an ally. Then some commentators are raising the question, well, why put money into their economy?” he added.

As such, European countries will be inclined to buy from European firms, or firm allies like South Korea, according to Roche, as they have the same strategic goals.

Roche pointed out that international arms transfers agreements basically allow the selling country, such as the U.S., to control the way a buyer uses the weapons they are sold, so with the U.S. questioning alliances, European and Asian countries would rather procure weapons from makers outside the U.S.

One such example is when Forbes reported in March that the U.S. had partially stopped support for its donated F-16 fighters in Ukraine, hampering its radar jammers built onto the aircraft.

“If you are going to have an autonomous defense policy, you have to have an autonomous military industrial complex. You have to make your own stuff, or get it from somebody who is on your side for the moment,” he said.

In Germany, lawmakers passed a historic debt reform, paving the way for a huge splurge on defense. U.K. Prime Minister Keir Starmer has also pledged to hike Britain’s national spend on defense.

The European Union has also drawn up plans to mobilize up to 800 billion euros ($883 billion) to bolster regional security.

These plans are expanding order books in companies like marine systems maker ThyssenKrupp Marine Systems, the warship division of parent company ThyssenKrupp.

CEO Oliver Burkhard told CNBC back in February that it expects its overall accessible customer base  to triple by the end of the decade.

Burkhard said the move shows that “when it comes to the defense budget, there is more or less no limit anymore.”

German arms manufacturer Rheinmetall, which is known for manufacturing Leopard 2 main battle tanks, said in March  that it expects its defense sales to jump by up to 40% this year, predicting “major high-volume orders from military customers.”

The sales increase was expected even without any potential boost from greater regional defense spending, the firm said, although it noted that it was “in a promising position to play a significant role in the upcoming increase in defense capability.”

These spending sprees are lifting Asian defense stocks too, because European arms makers cannot expand production capacity quickly enough to meet this sudden demand, said Taylor.

So they turn to Asian arms suppliers to fill this production capacity, resulting in orders from European countries to arms suppliers in Asia.

Since 2022, South Korean arms makers have received huge orders from European countries eager to expand their arsenals or replenish equipment donated to Ukraine.

For example, Korea Aerospace Industries supplied its FA-50 fighter jets to Poland after the country donated its Soviet-era fighters to Ukraine.

Hanwha Aerospace received orders from Poland and Romania for its K9 self-propelled howitzers in the past two years. In March, the South Korean company announced a rights offering worth 3.6 trillion South Korean won ($2.5 billion) to invest in overseas and domestic defense facilities, shipbuilding and drone engines.

The company, in its rights issue release, said it aims to become a “global player” in the aerospace, shipbuilding and defense space.

Singapore’s ST Engineering, which manufactures military equipment for the city-state, secured contracts to produce 155-millimeter artillery shells for European countries in 2024.

According to a March 18 note from brokerage firm CGS International, STE is “entering a multi-year earnings upcycle,” partly due to a large addressable market in international defense, particularly in Europe and the Middle East.

King Mallory, senior researcher at U.S.-based think tank Rand, told CNBC another reason Asian and European defense stocks are outperforming those in the United States is because the U.S. has always been the big spender on defense compared to other countries.

As such, he said that investors and portfolio managers don’t expect a huge shift in demand for U.S. defense stocks within the U.S., but with governments plunging money into domestic defense stocks, the huge demand surge is leading Asian and European stocks being revalued much more radically than American ones, he explained.

One example is Japan, which has seen shares rise in its domestic defense players despite having strict limits on arms exports.

Japan has plans to increase its defense spending to 2% of GDP by 2027, which has traditionally been capped at 1%.

As to whether a rise in international defense stocks will be a flash in the pan, all three analysts said that this demand would persist, perhaps even for the next 10 years.

According to Quantum Strategy’s Roche: “It’s not the choice between guns and butter, it’s the fact you have too much butter and no guns, and [the demand for defense equipment] is going to last a minimum of 10 years.”

— CNBC’s Chloe Taylor contributed to this report.