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Investing.com -- Barclays analysts anticipate that "US Defense could see [a] 5-10% benefit from higher European budgets," as Europe is now "targeting higher defense budget growth of approximately 70% to >$800B."
The bank’s note comes as European defense stocks have outperformed U.S. counterparts. “They trade at double the valuation of the US on average,” wrote Barclays (LON:BARC).
With the upcoming NATO summit, Barclays expects member countries to target defense spending at "5% of GDP," including 3.5% on core defense and 1.5% on defense-related infrastructure.
Barclays estimates that "all Europe members meeting 3.5% of GDP on core defense would represent an additional cumulative $335B in spending with total spending increasing to >$800B annually."
This substantial increase follows a decade where European defense spending has already risen from approximately $260 billion to around $490 billion annually.
U.S. defense companies are poised to benefit from this surge, as they are "approximately 7% exposed to Europe on average."
Barclays notes that specific companies like Lockheed Martin (NYSE:LMT) have 11% exposure, while L3Harris Technologies (NYSE:LHX) and Northrop Grumman (NYSE:NOC) have 7%, and RTX has 6% of total revenue.
Europe constitutes approximately "one-third of the U.S. companies’ total international exposure."
Barclays also highlights the "ReArm Europe plan" from March, which aims to increase EU defense spending by more than "$200B annually over four years."
Additionally, the U.K. plans to increase spending to "2.5% of GDP by 2027 and 3% of GDP by 2035."
Barclays estimates that "full participation in ReArm Europe + UK defense plans represents an additional $255B, or ~50% increase from current levels in total across Europe."
However, constrained production capacity from past consolidation could limit how quickly these higher budgets translate into revenue growth for U.S. companies.
