European defense stocks see potential growth amid rearmament

Analysts from Barclays and RBC Capital Markets suggest that recent declines in European defense stocks may present an attractive entry point for investors, driven by the continent's ongoing rearmament process.

RBC Capital Markets, led by analyst Colin Moody, has issued “outperform” ratings for Rheinmetall, Thales, and Leonardo, while assigning “sector perform” ratings to CSG, BAE Systems, and Saab. Barclays has upgraded Saab to “overweight” and initiated coverage for Kongsberg Gruppen, Babcock International Group, and Renk Group with the same recommendation.

While the overall outlook for the sector remains positive, analysts warn that the era of “easy gains” has passed. Afonso Osorio of Barclays noted that investors must now be more selective, as performance gaps between companies are expected to widen based on portfolio quality, visibility, and execution capabilities.

Despite strong earnings, the momentum of defense stocks slowed in the first half of the year due to high valuations and investor caution regarding military investment plans in Germany and the pace of technological development in areas like unmanned aerial vehicles.