JPMorgan booked gains on defense stocks and named new favorites

JPMorgan reduced the share of investments in the U.S., betting on shares in Europe and Japan. The bank's analysts were forced to turn away from U.S. assets by the unstable policy of Washington, increasing geopolitical tensions and fears for the independence of the Federal Reserve System, CNBC writes. As part of this reversal, the bank also revised its priorities within Europe, recording a profit on defense stocks and choosing the banking sector as a new favorite.

JPMorgan has changed its priorities for Europe in 2026, according to a note from the bank outlined by CNBC. While the defense sector was the main driver of growth in the region last year, with the STOXX Europe Aerospace and Defense core index soaring 56.5%, strategists believe it's time for capital rotation.

"After exceptional gains, we decided to lock in gains [in the defense sector]. This group has been struggling to make new relative highs for some time now. In our view, it will no longer deliver super profits. In 2026, we are more inclined to favor banks than defense as banking sector valuations still look attractive," the analysts wrote.

At the same time, current market data confirms that the sector still maintains inertia: February 18, the defense sector in Europe rose by 2%, noted Reuters. Quotes of British defense company BAE Systems added almost 2.6% after reporting a larger than expected increase in annual operating profit. Global demand boosted the company's order book to a record 83.6 billion pounds ($113.40 billion).

Nevertheless, JPMorgan is betting on the long-term outlook for the banking sector. The STOXX Banks Index jumped 80.3% in 2025, thanks to rising profitability and a surge in M&A interest. European bank stocks rose more than 1% on Wednesday, recovering from last week's sharp losses, Reuters reports.

In general, JPMorgan strategists maintain a long position on international markets against the U.S. market. Analysts are confident: shares in Europe and Japan will continue to overtake American ones, CNBC points out.

Japan's Nikkei 225 index has already gained 13% since the beginning of the year thanks to the so-called Takaichi bet: investors have been buying up stocks in anticipation of Prime Minister Sanae Takaichi's election victory, counting on subsequent massive government spending on AI, chips and the defense sector.

The European stock index has jumped more than 6% this year, showing growth of about 17% in 2025. Germany's DAX rose 23% last year, while the UK's FTSE 100 rose 21.5%. The leaders were Spain's IBEX 35, which soared almost 50%, and Italy's FTSE MIB, which increased in value by a third.

On Wednesday, February 18, STOXX 600 added 0.8% and reached a new record. Growth was provided by shares of defense companies and banks, notes Reuters.

JPMorgan reported that even with its focus on Europe and Japan, it favors developed markets over emerging markets this year. The trend that emerged a year earlier, not just maintained, but significantly strengthened: according to the bank's assessment, the shares of developing countries continue to grow at a faster rate, and the gap in yields is already reaching 10% in dollar terms, notes CNBC.

The main contributors to growth in 2025 were Latin America and a number of African countries, where investors saw higher yield potential, the channel said.

Net capital inflows into emerging market equities totaled $29.2 billion, the highest since 2021. This year it has already reached $55.5 bln.

JPMorgan analysts note that emerging market assets remain "significantly undervalued" and underrepresented in investors' portfolios: their average forward-looking P/E (a multiple that reflects the ratio of stock price to projected earnings) is 13, 33% lower than U.S. equities.

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