Defense stocks rally as Germany set to approve $60 billion defense splurge

German lawmakers are widely expected to approve a defense spending package worth more than 50 billion euros ($58.6 billion) on Wednesday, as the country moves to bolster its national security capabilities in the wake of the Ukraine war.

Meeting agenda documents for the Bundestag’s Budget Committee show politicians are set to discuss the defense procurement proposals on Wednesday. The committee can both approve and block major purchases.

According to German media, the proposed expenditure — which is expected to be passed — includes 22 billion euros for personal protective equipment and clothing for military personnel, and around 10 billion euros for upgrades to infantry fighter vehicles, air defense, and missile systems.

European defense stocks rallied on Wednesday morning as investors awaited the outcome of the meeting, which is widely expected to result in approval of the new military budget.

By 11:12 a.m. in London (6:12 a.m. ET), the Stoxx Europe Aerospace and Defense index was 1.2% higher, led by German defense giants Renk, up 2.8%, Hensoldt, up 2.4%, and Rheinmetall, which gained 1.8%.

Shares in the sector sold off on Tuesday, with the broader index shedding 1.8% in the session amid rising hopes of a peace deal to end the war in Ukraine.

Since the start of the year, the Stoxx Europe Aerospace and Defense index has surged more than 50%, with some regional defense players more than doubling in value amid commitments from regional governrements and the NATO military alliance to ramp up defense spending.

The pledges are widely expected to boost European firms’ bottom lines, with regionally headquartered companies already reporting record order backlogs and huge upswings in income.

German companies in particular have been beneficiaries of the regional defense boom, after the country’s government reformed historic legislation to pave the way for increased security spending. Arms manufacturer Rheinmetall, for instance, has seen its stock surge 150% this year.

“Germany’s roughly 50 billion [euro] defense procurement package, widely regarded as the largest single approval for defense equipment in the country’s post-war history, is set to benefit listed European defense primes such as Rheinmetall and Hensoldt, alongside a broader group of European suppliers to a lesser extent,” Dmitrii Ponomarev, a product Manager at VanEck, which manages a defense ETF, told CNBC on Wednesday.

They added that the move reflects a “long-overdue effort to rebuild military capabilities after decades of underinvestment.”

“Importantly, today’s decision does not alter Germany’s overall defense budget, which was agreed earlier, but instead represents the formal parliamentary sign-off on specific procurement contracts, effectively converting previously allocated funds into firm orders,” VanEck added. “This is a step investors have been waiting for, as it improves current revenue visibility for the sector.”

Michael Field, chief equity strategist at Morningstar, told CNBC’s “Squawk Box Europe” on Wednesday that the expected news out of Germany was “good in many ways.”

“Normally these things take some time to get through government, but the process seems to be speeding up which is good news for these companies,” he said, adding that the money reportedly earmarked for military protective equipment showed the German government would have to spend huge amounts to catch up after years of underspending.

“I think it’s certainly good news. Is it all priced in? Today’s share price moves upward would suggest not completely,” he added.

Field named Rheinmetall as one of Europe’s “best in class” defense firms, noting that it is one of the world’s biggest armaments manufacturers.

“If you need specific armaments, you basically have to go to them,” he told CNBC. “I think more companies like this … are all trying to develop their own specialties,  which will hopefully [see Europe] become a defense hub in global terms.”