Four scenarios are now in play, with the case for an independent European deterrent growing stronger by the day
Donald Trump's comments that he is strongly considering pulling the United States out of NATO have forced analysts at Citi to reassess the outlook for Western European aerospace and defence stocks, with the bank concluding that the balance of probability is moving against its previous base case.
Citi has mapped four scenarios. Two result in European defence spending rising, two in it falling. Until recently, the bank's base case held that the US would remain inside NATO, partly because European members had already begun raising their defence budgets. That assumption is under pressure.
The second scenario, in which Europe is compelled to build a credible independent deterrent following a US withdrawal, is now looking increasingly likely, according to the bank.
Citi said this outcome would probably trigger an initial positive share price reaction across European defence names if Washington did formally exit the alliance.
The remaining two scenarios, both of which point to defence spending declining, are characterised by Citi as tail risks rather than central outcomes.
The bank is careful to stress that it does not expect either to materialise in the near term, though it flags that their probability is rising as the likelihood of the original base case fades.
Trump made the comments to the Telegraph on April 1, though the White House offered no formal clarification.
For investors in European aerospace and defence, the practical implication is that the direction of travel on spending remains upward across the most likely scenarios.
Citi's caution is reserved for what happens further out, should geopolitical conditions shift in ways that reduce rather than intensify the pressure on European governments to rearm.