29 leaders gathered in Cyprus. As usual, the summit was about one who didn’t.

Europe’s real vulnerability is not a single headline event but the widening gap between strategic rhetoric and fiscal capacity. If Brussels concludes it must simultaneously rearm, harden infrastructure, and support a more fragile external trade environment, the marginal euro shifts away from growth-sensitive spending and toward defense, cyber, grid, and dual-use industrial capacity. That is structurally supportive for contractors and power/network equipment, while it is a quiet headwind for consumer cyclicals, airlines, and other sectors dependent on stable cross-border demand and cheap energy.

The second-order risk is that Middle East instability pushes Europe into a more persistent risk-premium regime without an immediate recession trigger. That combination is usually bad for banks and small caps: funding costs stay sticky, credit spreads widen, and capex decisions get delayed even if headline GDP holds up. The market often underprices this kind of slow-burn deterioration because it does not show up in earnings until a few quarters later, but it can compress multiples quickly once budget debates turn from “how much defense?” to “what gets cut to pay for it?”

The contrarian point is that the market may already be pricing the obvious geopolitical premium, but not the budget constraint that follows. If Europe re-prioritizes fiscal outlays toward defense and energy security, the winners are the cash-generative incumbents with domestic manufacturing and government exposure; the losers are firms reliant on discretionary public spending or long-duration growth assumptions. The more important catalyst is not another summit statement, but the next budget revision cycle and procurement announcements over the next 3-9 months.

A useful framing is to treat this as a relative-value rotation rather than a broad macro short. The cleanest expression is long European defense/infrastructure exposure versus economically sensitive industrials and banks, with the trade likely working best on any renewed escalation in the Middle East or evidence of fiscal reprioritization. If tensions de-escalate quickly and budget discipline reasserts itself, the trade should mean-revert faster than a typical war-premium setup, so sizing should reflect headline risk rather than conviction alone.