NextFin News - European defense valuations still look unfinished even after a powerful rerating, because the spending pledge that once sat in policy statements is now turning into order flow. That is the central argument from George Holst, BNP Paribas SA’s global head of corporate coverage, sectors & advisory, who said major defense groups have already secured firm government orders and passed them down their supply chains. The question now is not whether Europe is spending more on rearmament. It is whether investors are already fully discounting the industrial earnings that spending is likely to create.
Holst said the defense sector has seen “a real surge in orders” since the start of the year, and described the downstream impact as a “ripple effect” now in “full swing.” His view lands at a moment when the sector is already under fresh scrutiny. European defense shares have spent 2026 oscillating between optimism over higher military budgets and concern that valuations have run ahead of execution, especially after sharp swings in a handful of flagship names. That tension has only grown as governments translate budget pledges into contracts, and as the market tries to decide whether the cycle is merely hot, or genuinely changing shape.
The key distinction is that a spending promise is not the same thing as earnings power. Orders convert political intent into backlog, backlog converts into revenue, and revenue only becomes valuation support if margins, delivery schedules and working capital do not deteriorate along the way. That is why the sector’s next leg is likely to be judged less by headline defense budgets than by the pace at which contracts reach suppliers, subcontractors and equipment makers.
The strongest short-term read is that the move is still being driven by a cyclical surge in procurement rather than a clean, instant regime change in profitability. Europe’s governments can accelerate spending quickly in response to war, NATO commitments and strategic pressure, but production capacity, certification, component sourcing and labor still set the tempo. Demand can jump in a quarter; supply usually cannot. That imbalance is what makes the current phase powerful, but also noisy.
That is why the market keeps revisiting the same question in different forms: are defense stocks reflecting a durable structural shift in European security policy, or simply a multi-year cyclical burst that will eventually flatten as contracts are absorbed? The answer matters because a structural shift can support a higher multiple for longer, while a cyclical surge can lift earnings but still disappoint if investors pay too much up front. The first move in a rearmament cycle often looks like a valuation story. The later move is usually a delivery story.
Orders Are Finally Catching Up With Policy
Holst’s core point is that the sector has moved from promise to execution. For much of the post-Ukraine rearmament trade, governments talked up higher defense spending while manufacturers, suppliers and investors waited for the legal and procurement machinery to catch up. The market rewarded the names most directly exposed to that narrative, but it also had to absorb a stubborn truth: budgets do not book revenue on the day they are announced. Only signed contracts do that.
That delay mattered because investors were being asked to price both the political will and the industrial throughput at the same time. Holst’s comment implies that the second half of that equation is now improving. When he says major companies have received firm orders and passed them to suppliers, he is pointing to a chain reaction that can widen beyond the primes. A contract at the top of the chain can lift electronics, munitions, propellants, sensors, vehicle parts and maintenance services farther down. The valuation story therefore extends beyond a few well-known listed names and into the wider manufacturing base.
That is also why the market reaction to defense news has become less linear. A government can announce a spending goal, and the sector may rally on the idea alone. But when actual orders appear, the market has to separate three different effects: the revenue uplift that comes from backlog, the margin question that comes from capacity strain, and the multiple question that comes from whether growth can outlast the current geopolitical shock. The first is positive almost by definition. The second can be mixed. The third is where the debate lives.
One fresh example is NATO’s move to begin negotiations with Saab for up to 10 GlobalEye airborne early warning and control aircraft, announced at the Ankara summit on July 7. The selection matters not because one aircraft program changes the whole sector, but because it confirms that allied procurement is not confined to abstract spending targets. It is reaching specific platforms, suppliers and multi-year contract discussions. That is exactly the kind of evidence Holst is talking about when he says the ripple effect is now in motion.
For investors, the timing matters almost as much as the content. Orders that arrive in a single burst can temporarily overwhelm production lines, boost backlog and widen the revenue runway, but they can also create execution risk if factories, labor pools and sub-tier suppliers cannot keep pace. In that sense, the sector is not just getting bigger; it is getting more complex. The order book is moving faster than the supply chain.
Why The Valuation Debate Is Really About Duration
The deepest mistake in the current defense debate is to treat valuations as if they only reflect this year’s demand spike. They do not. They reflect how long the market believes the rearmament cycle can last, how much of it is already in the earnings base, and how much room remains for Europe to rebuild inventories, expand munitions capacity and modernize command-and-control systems. That is why the sector trades like a duration asset even though the underlying businesses are industrial.
In the near term, the sector’s valuation support is cyclical. Governments can fast-track procurement under strategic pressure, and that usually creates a burst of order growth that looks impressive on a year-over-year basis. But cyclical demand can slow once inventories are replenished, emergency budgets normalize, or political attention shifts. There are already signs that the market is sensitive to that risk. Europe’s defense rally has been interrupted by sharp periods of underperformance whenever investors question whether the spending boom can be translated into repeatable delivery.
That same sensitivity does not mean the whole story is cyclical. The longer-term backdrop is structural: Europe is planning for a world with higher defense spending, more domestic production, and less reliance on a single external security guarantor. That shift is not likely to reverse just because one contract cycle ends. It is being reinforced by NATO commitments, industrial policy and the political memory of supply fragility. In structural terms, the floor under defense demand is probably higher than it was before the war in Ukraine.
Still, a structural floor is not the same thing as a structural valuation premium. Investors often confuse the two. A permanent change in demand can justify a better earnings base, but the multiple only expands if the market believes returns on capital will stay strong even after the first wave of orders is absorbed. The mechanism is simple: if defense companies can keep converting orders into backlog without wrecking margins, the market can justify a higher multiple. If not, the sector may still grow but fail to reward shareholders with the same force.
That is why the comparison that matters is not just against last year’s budgets, but against prior defense cycles. After major geopolitical shocks, defense spending typically surges, suppliers get overbooked, and investors extrapolate the boom into the future. Then the sector usually enters a slower phase once the immediate replenishment wave passes. The current cycle could be different if Europe builds a deeper, more persistent industrial base. But that would require three things to hold at once: sustained public funding, stable procurement pipelines, and enough manufacturing capacity to prevent bottlenecks from eating into profits. That is a taller order than simply raising budgets.
“Since the beginning of the year, we have finally seen a real surge in orders in the defense sector,” George Holst said. “Major defense companies have received firm orders from governments and have passed them on to their suppliers. This ripple effect is now in full swing.”
The quote is important because it shifts the argument from policy to transmission. Holst is not saying only that Europe intends to spend more. He is saying the intended spending is reaching the operating layer of the industry. That distinction matters because the valuation multiple can only stay elevated if the market sees a credible path from policy to profit, not just from policy to headlines.
The Counter-Case: The Market May Already Be Pricing The Good News
The strongest argument against Holst’s optimism is that the market may already be pricing the order surge well before the full earnings benefit arrives. That is a serious objection. Defense shares have already rerated sharply over the past two years, and the most visible names have absorbed multiple rounds of geopolitical optimism, procurement announcements and NATO-driven demand hopes. If valuations already reflect a sustained rearmament cycle, then new orders may support revenue without producing much additional upside in the share price.
There is also a second, more structural counter-case: higher order flow does not automatically translate into higher returns on capital. In defense, long production lead times, export controls, cost inflation and supply bottlenecks can trap working capital and compress margins. If the market concludes that the sector is entering a lower-margin, higher-capital-intensity phase, the valuation argument weakens even if revenue grows. In that scenario, order books become evidence of demand strength but not necessarily of superior shareholder returns.
That objection has real force because the defense cycle is being pulled in two directions at once. On one side are governments that have committed to higher military spending and are now signing contracts. On the other are investors who want proof that the industrial base can scale without breaking. The market has already seen how quickly confidence can slip when one large program is delayed, restructured or canceled. Recent sector volatility has shown that the trade is no longer a one-way bet.
The falsifying signal for Holst’s view would be simple and measurable: if order intake fails to remain above recent elevated levels over the next several quarters, or if those orders do not flow through to visible backlog and revenue conversion by year-end, the valuation thesis weakens. More broadly, if companies begin warning that delivery bottlenecks, supplier shortages or margin pressure are overtaking contract growth, the market will have to reprice the sector as a cyclical spike rather than a durable re-rating.
That is the real test now. Not whether governments are serious. They are. The test is whether the earnings bridge from orders to profits stays wide enough for the market to keep paying up for it.
What Happens Next Depends On The Horizon
In the short term, the sector can still benefit from sentiment and backlog visibility. Orders, especially when they come from governments and blue-chip procurement programs, tend to attract follow-through buying from investors who want exposure to the defense cycle without waiting for every quarter’s delivery numbers. That short-term support can remain powerful as long as the flow of contracts continues and headlines reinforce the sense that the cycle is still building.
Over the medium term, the focus will shift to earnings quality. Investors will look for evidence that the order surge is translating into revenue growth, better plant utilization and stable or improving margins. The names most likely to benefit are those with the broadest exposure to munitions, electronics, command systems, maintenance and multi-year platform programs. The most exposed are those that rely on a single large contract, have thin supplier bases, or need heavy capital spending before the revenue lands.
Over the long term, the structural winners will be the companies and sub-sectors that can prove they sit inside Europe’s new defense architecture rather than just at the edge of a temporary restocking wave. That favors firms able to move from one-off hardware orders toward recurring service, systems integration and technologically differentiated programs. It also suggests that the sector’s valuation ceiling may ultimately be set less by geopolitics than by industrial discipline.
The base case is that the defense cycle remains supported by higher procurement and sustained NATO-aligned spending, keeping valuations elevated even if individual stocks become more volatile. The upside case is that orders accelerate again and the market concludes that Europe is entering a multi-year industrial rebuild, not just a temporary rearmament burst. The downside case is that the market decides delivery constraints and margin pressure will absorb the benefit of the order wave, forcing multiples lower even as backlog stays high.
For now, Holst’s message is that the market may still be underestimating how far the order cycle can run. But the question investors should ask is sharper: if orders are finally arriving, are they arriving fast enough to justify the price already paid for them?
The answer will come from the backlog, not the slogan. In defense, the order book is the story; the multiple is only the headline.
Explore more exclusive insights at nextfin.ai.
