Defense stocks in Europe and the United States surged in a falling market on Monday after news that Germany will increase its military spending in response to Russia's invasion of Ukraine.

2% of Germany's GDP

German Chancellor Olaf Scholz said on Sunday that defense spending in Europe's biggest economy will be increased to 2% of gross domestic product, from an estimated 1.53% in 2021, according to NATO statistics.

The country has resisted pressure to increase its military spending in the past, owing to its 20th-century history and despite international pressure to do so. An increase to 2% would match targets set out by NATO in 2006.

U.S. weapons makers were on pace for third session of gains, with Lockheed Martin, the maker of the F-35 fighter jet, advancing 5.4%. Raytheon and Northrop Grumman were up about 3.0% and 6.0%, respectively.

The SPDR S&P Aerospace and Defense ETF gained 2.5%.

In Europe, Britain's largest defense company, BAE , and Germany's Rheinmetall both surged to record highs shortly after Monday's open and were last up 11.0% and 25.8%, respectively. Both have large exposure to the weapons and ammunition market.

France's Thales added 12.1% and Italy's Leonardo gained 14.2%, while shares in German military sensor maker Hensoldt soared by more than 41.9%.

The pan-European STOXX 600 index, meanwhile, fell 1.0% and the S&P 500 dropped 1.2%.

Science and Engineering Fare Well

Other stocks exposed to the defense sector also outperformed the wider market. UK science and engineering company QinetiQ , which operates in the defense and security markets, rose 11.9% while Ultra Electronics was up 4.6%.

Defense stocks have come under pressure in recent years in the face of increased investor focus on ESG issues, though the crisis in Ukraine could lead to a rethink.

"More resources for defense among U.S. allies in Europe combined with the challenge from Russia could contribute to the development of a larger, more capable.. European defense industrial base that could.. become more competitive with that of U.S.," said Seth Seifman, analyst at J.P.Morgan wrote in a note.

"However, and in the near-term we see Germany's announcement as an opportunity for U.S. defense contractors."