Rheinmetall fell 19% in a day. Here is what the market got wrong about European defence

• Rheinmetall fell approximately 19% on 24 June — its biggest single-day drop on record — after Germany cancelled a warship programme. The market read this as European defence retreating. It was not.

• Germany did not cancel its warship requirement — it reassigned the contract to a rival German shipbuilder, TKMS, at a lower total cost.

• On the same day, Germany's parliament gave final approval to acquire a 40% stake in KNDS — the maker of Leopard 2 tanks, Caesar howitzers and the artillery shells NATO allies are sending to Ukraine. Germany did not step back from defence. It cut losses on a flawed contract and deepened its commitment to land warfare on the same day.

• The factories are moving. European ammunition production is up sevenfold since 2022. EU equipment procurement spending reached EUR 88 billion in 2024. MBDA doubled its missile output. Car companies are entering defence manufacturing at scale.

• The sector trades at approximately 18x 2028 forward earnings against our 26x fair value estimate. Our target price for WDEF remains EUR 42, implying approximately 41% upside. The sell-off has made the entry point better, not worse.

On 24 June, Germany cancelled its order for six large warships — a contract worth up to EUR 12.8 billion. Rheinmetall, which was expected to be the main builder, fell approximately 19% in a single trading session — its biggest one-day drop on record, according to Reuters. Other European defence stocks fell too. The narrative formed quickly: the European rearmament story is losing steam. Governments are pulling back.

Is that what happened? No.

In our May analysis, we argued that the 11% sector pullback from the January peak represented consolidation, not a turn in the cycle. The 24 June sell-off raises the same question — and our answer is the same.

The headlines told half the story. Germany did cancel the troubled F126 frigate programme, but it did not abandon naval modernisation. It is moving ahead with a different procurement route: up to eight MEKO A-200 frigates from TKMS, another German manufacturer, worth approximately EUR11.6bn if the option for the second batch is exercised. Rheinmetall lost a major opportunity. Germany’s requirement for new warships did not disappear.

On the same day, the German parliamentary budget committee gave formal approval to acquire a 40% stake in KNDS — the Franco-German manufacturer of Leopard 2 tanks, Caesar howitzers and artillery ammunition. This was separate from the frigate decision, not simply a reallocation of the warship budget. The KNDS stake is part of a broader strategic commitment to Europe’s land-defence industrial base.

Several strategic priorities were therefore reinforced, not reversed. Germany is still buying warships, but from TKMS rather than Rheinmetall. It is also locking in state ownership of KNDS, one of Europe’s core land-warfare producers. And after the collapse of the Franco-German FCAS fighter programme, Germany is now being discussed as a potential partner for GCAP, the UK-Italy-Japan next-generation combat-air project targeting a new aircraft by 2035.

The broader sell-off — Saab down around 3%, Leonardo 4%, BAE Systems 1.6% — reflected panic, not fundamentals. Those companies’ order books were unchanged. Their backlogs were unchanged. Their customers cancelled nothing. Even for Rheinmetall, the damage looked contained: the F126 contract was not in formal guidance, core backlog remains around EUR73bn, and full-year guidance is unchanged. At EUR12.8bn of expected revenue spread over a decade-plus delivery schedule, the lost opportunity would have contributed roughly single digit percentage of 2026 revenue guidance on a simple linear basis. The market sold the category when it should have read the details.

The US has already started pulling back. Here is why that makes European defence more compelling, not less.

On 18 June, US Defence Secretary Pete Hegseth flew to a NATO meeting in Brussels and told every European ally in the room: “Where other allies do not spend with urgency, our dues and contributions will go down.” A formal six-month review of US military commitments in Europe has been announced. The reductions have already started: the number of US F-15 fighter jets available to NATO has fallen by one third, to 99, and US Reaper surveillance drones available to the alliance have been cut in half, to 12. NATO Secretary-General Rutte confirmed these cuts are “immediate, not future.”

The US is not only asking Europe to take on more defence responsibility; it is also running short of the weapons Europe would normally expect to rely on. One week earlier, President Trump invoked the US Defense Production Act to force US defence companies to accelerate production of missiles, ammunition and weapons systems, after the US military consumed roughly half of its Patriot air-defence interceptors in just fifteen weeks of Middle East conflict. According to the Center for Strategic and International Studies, replenishment could take at least two to more than three years. This is effectively a legal acknowledgement that US factories cannot produce fast enough. For European defence makers, that shortage turns domestic capacity from a strategic preference into an urgent necessity.

The demand gap the US is leaving behind is not going unfilled — European defence companies are already winning orders in markets that had never looked at European suppliers before.

Two export wins confirm European supply is capturing allied demand

Canada — a Five Eyes partner and close US ally — designated Saab's GlobalEye as its preferred option for airborne early warning and entered formal negotiations, a significant step away from US suppliers and toward European defence. Prime Minister Carney stated the deal "builds Canadian strategic autonomy." This is not a European country choosing European. It is a US ally making a deliberate, public decision to buy European instead of American. Ukraine confirmed the purchase of 20 Saab Gripen E fighter jets (EUR 2.5 billion from the ratified EU loan), with stated intent for 150 in total. Saab currently produces approximately 15 of these jets per year against confirmed orders already exceeding 117 before Ukraine’s deal. In a market where supply cannot keep pace with demand, the waiting list is the earnings story.

Three layers of execution: what is happening inside the factories

The investment case does not rest solely on what governments promise to spend. Much of it rests on what is already being produced — and the rest on a production ramp that has already begun.

According to the European Defence Agency’s latest annual report, EU equipment procurement spending reached EUR 88 billion in 2024 — up 39% year-on-year and the fastest growth rate the EDA has ever recorded. Procurement spending in 2025 is expected to exceed EUR 100 billion. This is not a budget promise. It is actual spending already flowing into the industrial system.

Ammunition: the fastest-consumed category, and the first to expand

Three years ago, European annual artillery shell production capacity stood at roughly 300,000 rounds. By the end of 2025, that capacity had reached around 2 million rounds — a sevenfold increase. According to the Financial Times, cited in a February 2026 European Parliamentary Research Service report, Europe's arms factories are expanding at more than three times the peacetime rate.

Air-defence missiles: European substitution is taking place

The Iran war consumed a large number of US-made Patriot PAC-3 missiles, and replenishment timelines are long. That shortage has directly accelerated European demand for domestic air defence alternatives. MBDA, jointly owned by Airbus, BAE Systems, and Leonardo, doubled overall missile output between 2023 and 2025 and expects total missile production to rise by a further 40% in 2026. Production rates for the Aster missile family — used in Europe’s long-range air-defence systems and on warships— are also expected to double again this year.

Civilian manufacturing capacity is entering the defence supply chain

European defence production is no longer confined to traditional defence contractors. Civilian manufacturing capacity is being systematically mobilised.

European car factories are currently running at roughly 55% capacity utilisation — close to the lower end of factory break-even levels, according to consulting firm AlixPartners. High-quality manufacturing equipment, skilled labour and precision production lines are sitting semi-idle. That capacity is now being absorbed by defence contracts.

In a single 48-hour window in June, four separate European car companies announced defence manufacturing partnerships. Daimler Truck created a formal “Daimler Truck Defence” brand, committed several hundred million euros, and set a target of EUR 1 billion in defence revenue by 2028 — its chief executive describing defence as “a key pillar of growth strategy.” Renault partnered with Thales to produce armoured vehicles for the French army. Mercedes-Benz announced anti-drone vehicles. Ineos joined a UK Ministry of Defence consortium to build armoured light vehicles.

Renault is also developing aerial drones in a separate partnership. MBDA announced during Eurosatory 2026 that it had reached a partnership arrangement with an unnamed civilian manufacturer to mass-produce its Deluge one-way attack drone using a similar automotive mass-production model. Volkswagen’s Osnabrück factory, which had originally been scheduled to close in 2027, is reportedly in talks with Israel’s Rafael Advanced Defense Systems to discuss converting the site to produce components related to the Iron Dome air-defence system.

The Renault chief executive made the production speed argument directly: “We don’t take 30 years to do something — we’ll do it in 12 months.” Automotive manufacturing skills — precision engineering, supply chain management, mass production — transfer directly to the kinds of defence products Europe most urgently needs.

The difficulties facing one industry are becoming an opportunity for another. European car companies are facing severe pressure from Chinese competition, squeezing margins across the sector. The pivot to defence is partly a response to that pressure. And of all the industries they could have turned to, they chose defence. The economics have to make sense — otherwise they would not do it. That four major manufacturers arrived at the same conclusion in 48 hours tells you something about how large and visible the defence opportunity has become.

The European Commission has explicitly encouraged this cross-sector mobilisation in its November 2025 defence industrial transformation roadmap, describing it as an important pathway to easing capacity bottlenecks. This is not only a market-driven development. It is policy direction.

Earnings are validating this trend

First-quarter earnings also suggest that the European defence story is moving from budget promises into financial delivery. Leonardo delivered one of the clearest examples: new orders rose 31% year-on-year to EUR9.0bn, revenue increased 7% to EUR4.4bn, EBITA rose 33% to EUR281mn, and backlog reached approximately EUR57bn, with a book-to-bill ratio of about 2.0x.

Rheinmetall was more mixed on headline revenue, with Q1 sales of EUR1.94bn up 8% year-on-year but below market expectations. The important point, however, is that the shortfall was mainly timing-related rather than demand-led: management still expects growth to accelerate in Q2, backlog rose to EUR73bn, and full-year revenue guidance of EUR14.0–14.5bn was reaffirmed.

Saab also showed strong execution, with organic sales growth of 23.6%, EBIT growth of 32%, and positive operating cash flow. Thales’ defence segment added further confirmation, with sales rising 14.3% organically in the quarter.

Taken together, the message is clear: order books are not just expanding on paper. They are beginning to convert into revenue and earnings delivery.

Related article: European Defence: Backlog growth supports a multi-year earnings cycle

The sell-off has improved the entry point that was already compelling

The five core holdings in WDEF — BAE Systems, Rheinmetall, Thales, Leonardo and Saab — have an average backlog coverage of approximately 3.5 years of annual revenue. Rheinmetall alone has 6.4 years of backlog coverage.

Table 1: Projections for the WisdomTree Europe Defence ETF
	2025	2026E	2027E	2028E
EPS	10.83	14.29	17.58	21.04
EPS growth	-	31.95%	23.02%	19.68%
PE Ratio	35.82	27.15	22.07	18.44
Upside Potential (fair pe of 26x)	-	-	-	41%
Target Price  (EUR)	-	-	-	42
Source: Bloomberg Finance L.P., iFAST Estimates
Data as of 24 June 2026