Despite the positive sentiment, investors remain attentive to potential risks – but so far these risks have not dented market enthusiasm

One overhang is the political risk: defence budgets, though rising now, depend on threat perception and politics. A ceasefire or peace deal in Ukraine, for instance, could slow the urgency of new spending in Europe (though NATO’s new commitments suggest spending won’t fall back to pre-2022 levels). Additionally, many European countries face economic strains (high debt, aging populations), which in the long run could pressure defence outlays if the security situation improves. Investors are aware that current valuations bake in continued high spending; any sign of budget reversal could hit stocks. Another consideration is reputational risk: while the ESG narrative has improved, some institutional investors still face stakeholder questions about arms investments. For example, a pension fund might worry about public opinion if defence projects are linked to controversial conflicts. That said, public opinion in Europe currently favors strong defence postures due to the war – German and Japanese defence stocks, for instance, skyrocketed when their governments announced rearmament, with domestic investor support. The industry is also trying to mitigate future ESG concerns by emphasizing responsible policies (e.g., most companies now highlight contributions to defensive capabilities and humanitarian missions). Market analysts largely believe the defence upcycle has legs, given the structural shifts (e.g., Germany’s constitutional commitment of €100 billion, NATO’s possible new spending pledge). Sell-side coverage of defence firms has turned decidedly positive; many brokers have overweight ratings on European defence equities. The sector’s beta to broader market risks (like recession) is relatively low now because spending is government-driven. We saw this in early 2023: even as recession fears hit other sectors, defence stocks held steady. Sentiment among defence executives is also confident, which feeds into market views. CEOs are not only reporting good results but are investing for growth – hiring thousands of workers, reopening production lines, and pursuing M&A – signaling they foresee sustained demand. This conviction gives investors more courage to stick with the sector. In essence, while risks exist (peace breaking out, budget fatigue, geopolitical resolution), at the moment investors see the likelihood of continued tensions and defence prioritization as far higher. As long as that equation holds, private finance sentiment is expected to remain strongly in favor of defence. The key will be execution: governments must follow through on procurement plans (avoiding underspending allocated budgets), and companies must deliver orders on time (to justify further contracts). If those occur, the trust between public defence commitments and private capital will solidify, anchoring the positive sentiment for the foreseeable future.