Defense stocks fall as global market sell-off deepens

European defense giants whipsawed on Monday, abruptly paring losses as investors continue to grapple with a broad stock market downturn.

U.S. President Donald Trump showed no signs of letting up on his aggressive trade policy after rolling out sweeping new tariffs last week, saying that “sometimes you have to take your medicine.”

U.S. stock markets fell sharply for a third consecutive day on Monday, with all three major indexes dropping as part of a global rout.

European defense stocks, which have surged in recent months amid a regional push for strategic independence, pared back losses as a sell-off in the sector eased through the trading session.

German arms manufacturer Rheinmetall provisionally closed 2.5% lower, after falling as much as 27% shortly after the open. The company had briefly been on track for its worst day on record, according to Reuters.

Shares of German defense giant Thyssenkrupp fell 3.25%, Germany’s Renk Group traded 2.5% lower, while France’s Thales slipped 4.25%. Swedish defense manufacturer Saab was down 2.6%, while Italy’s Leonardo traded 3.3% lower.

Stateside, shares of Lockheed Martin and General Dynamics were last seen down by 1% and 1.24%, respectively, while Northrop Grumman fell 0.9%

Ben Heelan, head of EMEA aerospace and defense research at Bank of America, said the tariff impact on European defense stocks was likely to be “pretty small,” however. He added that current stock price levels represent a “great opportunity” for investors.

“What we’ve seen in Europe right now is that we’ve seen just this change in mindset, and that we now have visibility. We now have five to 10 years runway of growth as we move toward 3% of GDP,” Heelan told CNBC’s “Squawk Box Europe” on Monday.

“The next big datapoint is going to be Q1 results, where I think we will get a lot of commentary from companies about capabilities and capability reviews,” he added.

His comments come as defense spending looks set to soar in Europe following mounting pressure from Trump, who argues that allies are over-reliant on the U.S. for their own security.

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

The European Union has also drawn up plans to mobilize up to 800 billion euros ($862.2 billion) to bolster regional security.

Asked for his reaction to Rheinmetall’s stock price plunge on Monday, Bank of America’s Heelan said: “What you’re seeing today is just the de-grossing impact of a sector that has been very, very loved from clients, particularly over the last three to six months.”

De-grossing refers to when hedge funds significantly reduce their overall exposure to a particular market or asset class.

The White House has imposed a separate 25% duty on foreign auto imports, as well as a 25% tariff on all steel and aluminum products.

Loredana Muharremi, equity research at Morningstar, said Monday that even if Trump’s tariffs were extended to defense-related goods, the impact on European stocks under its coverage would likely be limited.

“While it’s still early to assess the full impact of the new tariffs on the defense sector, it’s worth noting that Europe remains a net importer of U.S. military defense equipment,” Muharremi told CNBC via email.

“Companies like BAE Systems, Rheinmetall, Thales, Saab, and Leonardo have already established — and in many cases expanded — their industrial footprint in the U.S., in anticipation of a potential Trump re-election. This local presence not only supports their access to U.S. defense contracts but also provides a hedge against tariffs,” Muharremi said.

— CNBC’s Chloe Taylor contributed to this report.