US Defense Spending Falls Out of Lockstep With Europe

As the cold front between the US and Russia melts, defense contractors are feeling a chill.

The biggest US defence contractors have seen their share prices fall while their European counterparts have rallied, the Financial Times reported on Tuesday. That’s because the Trump administration is positioning itself to reduce military aid to Ukraine, which has been combating a Russian invasion for three years, while Defense Secretary Pete Hegseth plans to cut 8% from the US military budget every year for the next five years.

The Art of Budgeting

By contrast, European military contractors are licking their chops. On Monday, the US signalled that its relationship with Russia may be thawing even further, by voting alongside Russia to reject a UN resolution condemning Russia’s invasion of Ukraine. The US and Ukraine did reach an agreement on a deal exchanging Ukraine’s mineral resources for military support, but per the Financial Times the text of the deal didn’t specify exact security guarantees. So European leaders, unsurprisingly, are gearing up for the possibility of a sudden America-shaped hole in that particular war’s budget:

• Friedrich Merz, leader of Germany’s Christian Democratic Union (CDU) party that won the largest vote share in Sunday’s election, said he wants to stop relying on the US. “My absolute priority will be to strengthen Europe as quickly as possible so that, step by step, we can really achieve independence from the USA,” he said.
• The UK on Tuesday announced that it will increase defense spending from 2.3% of GDP to 2.5% by 2027. Prime Minister Sir Keir Starmer said the boost, intended specifically to combat Russia, would be the “biggest sustained increase in defense spending since the end of the cold war.”

Out in the Cold: With VC investment already at a record high for European defense companies, the rallying of European governments is providing an extra boost that their US peers probably envy. Palantir, a defense contractor which initially benefited from the Trump trade, has seen its share price slide 30% from a peak on February 18, two days before Hegseth announced the Pentagon budget cuts.