(Bloomberg) -- The European defense and aerospace sector experienced a significant downturn as investors reacted to escalating concerns that new tariffs imposed by the United States could disrupt crucial supply chains within the industry. This situation has also prompted some investors to take profits from a series of outstanding performances by various stocks in the region throughout 2025.

The impact was particularly severe for German defense manufacturer Rheinmetall AG, which saw its stock plummet by as much as 27% at one point, marking the most drastic single-day decline in its history. Fortunately for the investors, the decline was mitigated, and the stock ultimately settled with a loss of less than 5%. This recovery came after the company’s Chief Executive Officer made a strategic move to purchase shares at a discounted rate, signaling confidence in the firm’s future performance.

Other notable companies in the sector also faced pressure from the market. Airbus SE, a leading planemaker, and Rolls-Royce Holdings Plc, known for its aircraft engines, both recorded declines of up to 14% at the height of the sell-off, before managing to recover slightly.

The turmoil in the market was triggered by a report from Reuters which highlighted a concerning situation with Howmet Aerospace Inc., a US-based supplier of critical aircraft components to manufacturers like Airbus and Boeing Co. The company declared a force majeure in response to the sweeping tariffs enacted by US President Donald Trump. Jefferies analysts, including Sheila Kahyaoglu, pointed out the potential ramifications of this declaration, stating, “Howmet has made a chess move. It takes just one nut or bolt to stop the aerospace and defense supply chain.” They warned that if other suppliers, such as engine manufacturers or avionics firms, were to follow suit, it could lead to a halt in aircraft deliveries altogether.

The downtrend extended beyond Rheinmetall, impacting stocks of other key players in the defense sector including France’s Thales SA, Germany’s Hensoldt AG, and Italy’s Leonardo SpA, all of which saw their share prices decline amidst this climate of uncertainty. The defense sector has been a significant outperformer this year, as various European nations ramped up commitments to enhance their security capabilities, largely driven by apprehensions surrounding the potential withdrawal of US military support in the region. Investors seeking to minimize their exposure to riskier assets have thus targeted these stocks, capitalizing on the impressive gains made earlier in the year.

Despite the recent sell-off, Graeme Bencke, a fund manager at Amati Global Investors Ltd., expressed that the long-term outlook for European defense stocks remains favorable. In an interview, he noted, “There’s possibly a little bit more reality creeping into the share prices. The outlook for European defense stocks is still pretty robust, but a lot of that did get priced in very quickly.”

Data from Goldman Sachs Group Inc. revealed that a basket of pure-play European defense stocks is still up nearly 50% year-to-date, showcasing the sector's resilience and attractiveness to investors. The basket is currently priced at 26 times the earnings expected in the coming year, a notable increase from a ratio of 18 times at the beginning of the year. This valuation is significantly higher than the eight times earnings multiple observed prior to Russia's invasion of Ukraine in 2022.

Chris Beauchamp, chief market analyst at IG Group, commented on the current market dynamics, saying, “Hope has collided with reality for defense names in Europe. Increased defense spending has yet to actually materialize, and we are in a firesale situation now for stocks as a whole.” The market's volatility highlights the ongoing challenges and uncertainties faced by the defense industry amid shifting geopolitical landscapes and economic pressures.