Europe's rally in defense stocks is nearing a peak, says Deutsche Bank. What to buy?

European defense stocks, after rising 23% since the beginning of 2026, may be approaching their peak valuations, according to analysts at Deutsche Bank. In their opinion, further rally may slow down due to possible changes in the geopolitical situation and persistent differences in defense budgets of the region's countries. This assessment stands out against the largely optimistic expectations of other banks and analysts, who continue to bet on the sector.

European defense stocks may be nearing the peak of their valuations, Bloomberg wrote, citing a note from analysts at Deutsche Bank.

Strengthening U.S. claims to Greenland and plans to increase military spending in Europe were among the factors pushing Goldman Sachs' basket of European defense securities up 23% since the start of 2026. However, Deutsche Bank believes that the forthcoming peace plan in Ukraine and budget differences among European countries could hold back the rally.

"Further revaluation is unlikely due to conflicting geopolitical factors. Regional differences in defense spending are likely to persist, affecting French and British companies relative to their German counterparts," said analysts led by Christophe Menard. Now, a basket of defense stocks from Goldman Sachs is trading at 32 times projected earnings (P/E ratio): that's almost double that of Europe's Stoxx 600 index, Bloomberg noted.

While Germany, seeking to create the strongest army in Europe, has already become the region's leader in defense spending, in France Deutsche Bank analysts point to budget risks due to political instability, and in the UK - the lack of a clear timetable for increasing military spending.

Analysts at Deutsche Bank downgraded shares of French aerospace and electronics company Thales, British defense group BAE Systems and Italian defense-industrial concern Leonardo from "buy" (Buy) to "hold" (Hold). They cited budget uncertainty and expectations of limited growth potential from current levels, Bloomberg writes.

The Deutsche Bank team's priority securities include European aerospace concern Airbus, French aircraft engine and equipment supplier Safran, German aircraft engine maker MTU Aero Engines and German defense concern Rheinmetall.

Shares of Thales fell 2.2% in Paris trading on January 13, BAE Systems securities traded in London lost 1%, and Leonardo securities on the Milan stock exchange, on the contrary, rose 0.5%.

Airbus shares in Paris hit a new record and rose 1.87% on the day, Safran MTU shares also hit a new peak and rose 2.13%, while MTU Aero Engines added 0.3% and Rheinmetall 0.7%.

Deutsche Bank's stance differs from many of the optimistic assessments of other banks, Bloomberg writes.

Morgan Stanley, for example, lists the defense industry as a priority sector along with the banking sector, highlighting Rheinmetall and Airbus among individual securities. UBS Group believes that the internal policies of EU countries contribute to the formation of "global champions" in defense, energy and infrastructure, pointing to strong structural demand in these segments.

This article was AI-translated and verified by a human editor