Investing.com -- Jefferies analysts have begun research coverage on five European defense stocks, as the bloc comes under increased pressure to accelerate its spending in this sector.

The investment banking firm named Rheinmetall (ETR: RHMG ) as its top pick, with strong growth potential and short-cycle appeal, followed by RENK Group AG (ETR: R3NK ), Dassault Aviation SA (EPA: AM ), Leonardo SpA (BIT: LDOF ), and Hensoldt Ag (ETR: HAGG ).

“We have seen a clear paradigm shift in Europe around defense spending,” analysts led by Chloe Lemarie said in a report titled "If You Want Peace, Rearm Europe".

“This has been triggered by the risk of the U.S. removing support to Ukraine in the ongoing war and also the perception of its protection granted to Europe being at risk, especially in the context of a potential conflict with Russia,” they added.

Europe’s defense spending could jump from 2.0% of GDP in 2024 to potentially 3.0%-3.5% by 2030. According to the analysts, this would imply 7% growth per annum on top of GDP, and 10% above to 3.5% over the same timeframe.

Rheinmetall and RENK are seen as key beneficiaries of this trend. Both companies have seen earnings revisions that closely match the 32% compound annual growth rate in NATO equipment spending from 2022-2024.

“As equipment budgets in Europe are facing another similar rapid expansion, we are comfortable being 49% above Rheinmetall’s 2027 target. On this assumption of more vigorous growth, RENK and Rheinmetall do not appear fully valued,” the analysts continued.

Dassault Aviation, with its Rafale fighter jet program, is also well-positioned as Europe shifts away from U.S.-made platforms.

A pivot towards European-made platforms “should favor Rheinmetall, Leonardo on land defense, and Dassault Aviation on the Rafale over BAE,” analysts said, adding that Eurofighter production could also rise significantly.

Jefferies rates Leonardo as a Buy, citing its exposure to Italy’s defense ramp-up and Eurofighter momentum.

RENK, another Buy, is expected to benefit from strong land defense trends. Hensoldt, however, is the only stock with an Underperform rating, with Jefferies flagging its unappealing valuation and potential program disappointments.

From a broader perspective, Jefferies expects continued investor interest in European defense stocks, particularly from continental European buyers.

Meanwhile, the firm downgraded Thales (EPA: TCFP ) shares to Hold, noting that the stock "has now re-rated too quickly given its longer-cycle nature."