How a US-NATO Split Would Hit Your Portfolio

Donald Trump is reportedly strongly considering pulling the United States out of NATO — a move that would redraw the security map of the Western world overnight. But forget the geopolitics for a moment. The more pressing question for most people is: what does this mean for your money?

European defense stocks have already surged +260% since Russia's 2022 invasion of Ukraine. Gold is trading at record highs above $5,000/oz. And the euro is strengthening against the dollar in what institutional traders are calling the "Sell America" trade. Whether or not a formal US withdrawal from NATO ever happens, the money has already started to move. Here's what it means for your portfolio.

What's Already Happening in Markets

The "Sell America" Trade — Dollar, Bonds, US Equities

The prospect of a fractured Western alliance hasn't appeared overnight. Since 2022, institutional money has been quietly but consistently rotating away from traditional US-centric safe havens. The so-called "Sell America" trade — dumping US Treasuries, shorting the dollar, and underweighting US equities — has picked up serious momentum in 2025 and 2026.

The euro has been strengthening against the dollar as capital flows into European assets that now look more strategically relevant. The EUR/USD pair has climbed meaningfully in 2025–2026 as capital rotates out of dollar-denominated assets. For unhedged international equity holders, this is a tailwind — your European holdings translate back to more dollars.

This isn't just about NATO — it's also about the broader de-dollarization shift, where global investors are questioning the assumption that US assets are automatically the safest place to park money in a crisis.

For the average investor, this matters because your international holdings, if unhedged, will look more valuable in dollar terms as the USD weakens. Your US equity funds, however, may face a headwind that has nothing to do with earnings. Markets are already pricing in sustained uncertainty — and elevated volatility means periods of sharp drawdowns followed by sharp recoveries. If you're a long-term buy-and-hold investor, this is mostly noise. If you're close to retirement or drawing down, it's worth paying attention to sequence-of-returns risk.

The Defense Stock Surge — Is It Too Late?

Military helmet and defense equipment — the rearmament supercycle

European Defense: The Numbers Behind the Rally

This is where the story gets genuinely jaw-dropping. European defense stocks have been on a multi-year tear that most investors completely missed.

Rheinmetall (RHM): Up +200% in 2025 alone. Since Russia's invasion of Ukraine in February 2022, the stock is up +260%.
BAE Systems: Up +21% year-to-date in 2026, trading around £20.88/share.
STOXX Europe Aerospace & Defense Index: Up +260% since the Ukraine invasion.
Select STOXX Europe A&D ETF (EUAD): Up +39% in 2025 alone.

The driver isn't hard to explain. After decades of underspending on defense and relying on the US security umbrella, European governments are scrambling to rearm. In 2025, all 32 NATO members met the 2% of GDP spending target for the first time in the alliance's history. Then, at The Hague Summit in 2025, they agreed to a new target: 5% of GDP by 2035 (3.5% core military spending plus 1.5% for security infrastructure). The implied additional spend is roughly $2.7 trillion per year by 2035 compared to today's levels.

Poland is already at 4.3% of GDP — the highest in the EU. Germany has pledged €90 billion to its military rebuild. That money has to go somewhere, and it's going into defense contractors.

Country	Defense Spend (% GDP, 2025)	Note
Poland	4.3%	Highest in EU
United States	~3.4%	Baseline contributor
Germany	~2.1%	€90B pledged
France	~2.1%	Major capability holder
Italy	~1.5%	Below target until recently
NATO Average	2.33%	Up from 1.43% in 2014
New target (2035)	5%	Agreed at The Hague Summit

Caption: NATO defense spending has risen sharply since 2022 — and the new 5% target means the spending cycle is far from over.

There's even an ETF with the ticker NATO — the Themes Transatlantic Defense ETF — which has become a simple, memorable way for retail investors to get direct exposure to this theme.

US Defense: A Different Story

Here's where things get counterintuitive. US defense stocks — despite being the world's largest and most well-funded military-industrial complex — have massively underperformed their European counterparts.

Lockheed Martin (LMT): 2025 sales of $75 billion (+6% YoY), $194 billion backlog — fundamentally solid, but the stock is not on a European-style tear.
RTX Corporation: Beat Q3 2025 forecasts.
Northrop Grumman: $95.7 billion backlog.
iShares US A&D ETF (ITA): Up only +5.4% year-to-date in 2025.

Compare that +5.4% to the EUAD's +39% in the same period and you start to understand why European defense stocks have been the conversation in institutional circles. The thesis is straightforward: European companies are the marginal beneficiaries of Europe's rearmament. US companies mostly sell to the US government, which isn't dramatically increasing its defense budget in the same way.

The Valuation Question — Already Priced In?

Here's the honest part of the analysis: European defense stocks are not cheap.

They're currently trading at around 30x forward P/E — roughly double their five-year historical average. That's the market pricing in the rearmament thesis already. Rheinmetall at +200% in one year isn't an undiscovered story anymore.

Does that mean you've missed the boat? Not necessarily. If NATO fractures and Europe genuinely needs to provide its own security umbrella for the next 20–30 years, the spending cycle is in its very early stages. But if you're buying at these valuations, you're buying into an already-elevated price that assumes the thesis plays out. Any sign of de-escalation or diplomatic resolution could mean a sharp correction.

This is the kind of risk that doesn't appear in a headline but matters a lot to your actual returns.

The Unexpected Winners

Gold at Record Highs — The Geopolitical Hedge

Gold has been the clearest beneficiary of prolonged geopolitical uncertainty.

Gold bars — the geopolitical safe haven asset

In 2025–2026, it hit a peak of $5,434 per ounce, up as much as 208% year-over-year at its high. Even at more moderate levels, gold at $4,860+ represents a historic repricing of the geopolitical risk premium.

For portfolio purposes, gold acts differently from equities. It doesn't generate earnings, doesn't pay dividends, and can be frustrating to hold during bull markets. But in a world where the post-WWII security architecture is being dismantled in real time, it has done exactly what it's supposed to do: hold value when everything else feels uncertain.

If you hold gold ETFs or physical gold as part of a diversified strategy, the current environment validates that positioning. If you hold none, the ship has sailed somewhat — but gold's role as a hedge doesn't disappear because the price is higher.

EUR/USD and the De-Dollarization Shift

The euro has been strengthening as the "Sell America" trade picks up steam. A weaker dollar benefits holders of international equity funds (particularly European ones) in dollar terms — your investment is worth more when translated back to USD.

But it also signals something broader: global reserve managers, sovereign wealth funds, and institutional investors are reassessing their dollar exposure. This isn't a prediction that the dollar collapses — that's an extreme tail risk, not a base case. But marginal de-dollarization, playing out over years, creates a consistent headwind for dollar-denominated assets.

Energy Markets Under a Fracture Scenario

Energy markets would face significant pressure in a fracture scenario. European energy security, already tested by the Russia-Ukraine conflict, relies partly on US-backed security frameworks. A breakdown could push oil toward elevated levels not seen since 2022 — and reignite the inflationary dynamics that investors spent 2022–2023 dealing with.

For your portfolio, it means energy sector exposure (directly or through broad index funds) could become much more significant — both as a risk and as a potential return source.

What About Your Index Fund?

World business newspapers — tracking geopolitical market impact

How Exposed Is a Typical ETF Portfolio to NATO Risk?

If you hold a global equity ETF or a standard 60/40 portfolio, you are already exposed to this theme — just not in an obvious way.

US equities (typically 60–70% of a global fund) are exposed to the "Sell America" dollar risk and any volatility-driven drawdowns.
European equities within that same fund have benefited from defense spending and may continue to do so.
Bonds, particularly US Treasuries, are under pressure from the de-dollarization trade.
If your fund has no gold, no commodities, and no explicit European defense exposure, your geopolitical hedging is essentially zero.

None of this means your index fund is broken. It means you should understand what you own.

What History Says: Markets Always Recover

Here's the most important data point in this entire piece: markets always recover from geopolitical shocks.

Average initial S&P 500 drop on a major geopolitical shock: -5%
Average 12-month return after those same shocks: +11%
Cuban Missile Crisis: -7%, recovered in roughly 2 weeks
Gulf War: -16%, recovered within months
9/11: -11% in the first week, recovered in about a month

The pattern is consistent: panic, drop, recovery. The investors who got hurt were those who sold at the bottom. The investors who did fine were those who stayed the course — or, better yet, bought into the dip.

A NATO fracture is an unprecedented event in modern history, so it would be foolish to say "definitely fine, history says so." But the historical base rate is clear: if you're a long-term investor, geopolitical shocks are buying opportunities more often than they are reasons to exit.

Should You Rebalance?

Maybe — but not because of NATO specifically. Rebalancing makes sense if:

Your portfolio has drifted significantly from your target allocation (e.g., US equities now represent 80% of a portfolio that should be 60%)
You have no exposure to assets that behave differently from equities (gold, short-duration bonds, commodities)
You're significantly overweight or underweight a sector that has moved dramatically (e.g., you accidentally now have a huge defense weighting through European funds)

What rebalancing is not is an excuse to make panic decisions based on headlines.

What Should You Actually Do?

If You Hold a Diversified ETF (Spoiler: Not Much)

If you hold a low-cost global ETF and you're investing for the long term, the honest answer is: probably not much. You're already diversified across geographies and sectors. The defense theme is partially in there. The geopolitical risk is partially priced. Sitting tight and continuing to contribute regularly is likely the right move for most people.

Where people go wrong is when they try to react to every major headline with a portfolio change. Transaction costs, taxes, and the simple difficulty of timing markets correctly all work against you.

If You Want Defense Exposure — The Options

If you've looked at Rheinmetall's chart and you're wondering how to access European defense stocks more deliberately, there are a few ways to think about it:

Broad European defense ETFs (like EUAD) give you diversified exposure without betting on a single company.
The NATO ETF (Themes Transatlantic Defense ETF) is worth knowing about — it's a thematic fund built explicitly around the transatlantic defense theme.
Individual stocks like BAE Systems, Leonardo, Thales, or Rheinmetall are accessible through most brokers, but come with single-stock concentration risk.

The key question you need to ask yourself: are you buying a long-term structural trend (European rearmament over 10–20 years) or trying to catch the next leg of a trade that's already +260%? The first is an investment thesis. The second is speculation.

If You Want to Hedge — What Works and What Doesn't

For hedging geopolitical risk, the tools that have actually worked in this cycle are:

Gold: proven, liquid, and already running hot — expensive to enter now but still functionally relevant
Currency diversification: having some exposure outside USD, particularly EUR or CHF, acts as a hedge against dollar weakness
Short-duration bonds: less sensitive to rate moves and safer in volatile environments than long-duration
Commodities broadly: oil, metals, and agricultural goods tend to do well in supply-shock scenarios

What doesn't work well: trying to time short-term market moves with leveraged products, panic-selling diversified positions, or loading up on a single "safe haven" trade at its peak.

If you want to get a clearer picture of how your current portfolio sits across all of these exposures, NeoApp can help you track and understand your financial position — so you're making decisions based on what you actually own, not what you think you own.

FAQ

What happens to the stock market if the US leaves NATO?

A US withdrawal from NATO would likely trigger an initial sharp sell-off — analysts estimate an initial S&P 500 drop of around 5-10% — followed by a period of elevated volatility. Based on historical geopolitical shocks, markets have consistently recovered over a 6-12 month horizon. European defense stocks and gold would likely benefit most in the near term.

Are European defense stocks still a good buy?

European defense stocks have had an extraordinary run — the STOXX Europe Aerospace & Defense Index is up 260% since 2022. They're currently trading at approximately 30x forward P/E, double their five-year average. The long-term structural thesis (European rearmament) remains intact, but valuations already reflect a lot of good news. Entry at these levels carries more risk than entering three years ago.

Is it too late to buy Rheinmetall or BAE Systems?

That depends on your time horizon and risk tolerance. Both stocks have already priced in significant rearmament spending. Rheinmetall is up 200% in 2025 alone. If you believe European defense spending will continue rising for the next decade — which the NATO 5% GDP target implies — there may still be upside. But near-term valuation risk is real.

What's the best way to add defense exposure to a portfolio?

For most retail investors, a defense-focused ETF is more appropriate than individual stock picking. Options include the Select STOXX Europe A&D ETF (EUAD) for pure European exposure, or the Themes Transatlantic Defense ETF (ticker: NATO) for broader transatlantic coverage. These provide diversification within the theme.

Should I buy gold as a NATO hedge?

Gold has already done significant work as a geopolitical hedge — it's up 200%+ at recent peaks. Buying at current levels means you're paying a significant premium for protection that the market has already priced in. That doesn't mean it won't keep rising, but the risk/reward is different from buying it three years ago. If you have zero gold exposure, a modest allocation still makes sense for portfolio resilience.

What is the NATO ETF ticker?

There is an actual ETF with the ticker NATO — the Themes Transatlantic Defense ETF. It's designed to track companies involved in transatlantic defense, spanning both European and US defense industries. It's become a popular shorthand for investors wanting thematic exposure to the rearmament trend.

This article is for informational and educational purposes only. It does not constitute financial advice. Always do your own research and consider speaking to a qualified financial advisor before making investment decisions.