Defense stocks in Europe and the US rose on Monday as the market fell after news that Germany would increase military spending in response to Russia's invasion of Ukraine, Reuters reported.

German Chancellor Olaf Scholz said on Sunday that defense spending in Europe's largest economy would be increased to 2% of gross domestic product, up from 1.53% in 2021.

Shares in Britain's largest defense company BAE and Germany's Rheinmetall surged to record highs shortly after Monday's open, up 13.9% and 29.9%, respectively. Both have great access to the arms and ammunition market.

French Thales rose 13% and Italy's Leonardo 17.2%, while German military sensor maker Hensoldt surged more than 56.1%.

Meanwhile, the pan-European STOXX 600 fell 1.3%. Futures for US stock indices fell almost 1.5%.

American arms makers increased profits: Lockheed Martin - 5.5%, Raytheon and Northrop Grumman rose by about 5%.

Other defense stocks also outperformed the market as a whole. Shares of British science and engineering company QinetiQ, operating in the defense and security markets, rose 11.8%, while shares of Ultra Electronics rose 4.8%.

Defense stocks have come under pressure in recent years due to heightened investor focus on ESG issues, although the crisis in Ukraine could lead to a rethink.

“The Russian invasion of Ukraine has fundamentally changed the European Defense Sector (EDS) landscape,” said analyst J.P. Morgan David Perry. “Secondly, in terms of the reputation of the ESG sector, more investors may agree that ‘protection’ is necessary to preserve peace and democracy, leading to a re-evaluation of EDS,” he added.