European defense stocks continued their rally on Tuesday, as President Trump’s threats to reduce American military support to the continent and NATO raised the prospect that Europe’s governments will increase military spending.
The flurry of trading helped push the Pan-European Stoxx 600 index to a record high; the Stoxx Europe Total Market Aerospace & Defense index is up 19 percent this year.
Senior American and Russian officials gathered in Riyadh, Saudi Arabia, on Tuesday for a high-stakes meeting that could further determine the sector’s fate. At the top of the agenda is ending the fighting in Ukraine, Europe’s deadliest war in generations. But representatives from Europe or Ukraine did not attend, raising questions about cracks in the Western alliance.
The State Department is playing down the talks as exploratory. But Russia has cast the meeting as an opportunity to break Moscow’s isolation and rebuild business ties with the West. Kirill Dmitriev, the head of Russia’s sovereign wealth fund who is in Riyadh, invited American oil giants to return to the country, dangling “access to Russian natural resources.”
Investors are watching closely, pushing up European defense stocks. Shares of Rheinmetall, a German arms maker, have surged nearly 13 percent since Friday, and are up more than 50 percent this year.
The rally did not extend to bonds, though. Investors sold their sovereign debt holdings on concerns that increased military spending would require heavy borrowing and cost European governments trillions of dollars over the next decade.
The stock surge belies a pervading sense of gloom in Europe. Even before being shut out of the Ukraine negotiations, Europe was feeling increasingly sidelined. Vice President JD Vance stunned attendees at the Munich Security Conference last week by taking aim at European allies.
Experts and commentators have raised questions about the future of U.S.-European relations. Their big fear is President Vladimir Putin of Russia gaining the upper hand in Ukraine talks — especially if Mr. Trump looks to secure a windfall of mineral resources — putting Europe at risk.
Europe was already bracing for a bruising trade war precipitated by Mr. Trump. Tariffs are seen as keeping the region in a low-growth rut. They could also drive a wedge between E.U. members, especially if America plays favorites with ideological allies, said Alessandro Penati, an economist and the president and founder of Quaestio Capital Management, an asset management company.
“I think the strategy of Trump is just to break up Europe,” he said. “He has already been very successful in doing that.”