European defence stocks climb after Russia's largest attack on Ukraine

European defense stocks, including BAE Systems, QinetiQ, and Melrose Industries, surged following Russia's intensified attacks on Ukraine and anticipation of the upcoming NATO summit. JPMorgan analysts indicated that current share price targets for many European defense companies may be too low, suggesting potential forecast revisions and continued sector outperformance in the near term. The surge is also attributed to a broader geopolitical shift, including increased defense spending plans by Germany and the EU, spurred by concerns over European security independence from the US.

Analysis

European defence and aerospace stocks, including BAE Systems PLC, QinetiQ Group PLC, and Melrose Industries PLC, experienced a notable rise on Tuesday, May 27, 2025. This appreciation is attributed by JPMorgan analysts to two primary factors: heightened geopolitical tensions following Russia's largest aerial attack on Ukraine since the conflict began, which killed at least 12 people, and expectations surrounding the upcoming NATO summit. JPMorgan indicated that its current share price targets for many European defence companies are likely too low and that the sector could continue to outperform the market in the near term, prompting a potential revision of their forecasts due to rapidly evolving events. This market movement occurs within a broader context of a significant geopolitical shift, wherein Europe is initiating a substantial rearmament cycle. This cycle was largely triggered by comments from the Trump administration suggesting Washington would no longer shoulder primary responsibility for Europe's security. Consequently, Germany's new government under Friedrich Merz has approved major new defence spending plans aiming for security 'independence,' the EU Commission has outlined plans for €800 billion in additional defence expenditure, and UK Prime Minister Keir Starmer has pledged to increase defence spending from 2.3% to 2.5% of GDP over the next two years. Adding to the tense atmosphere, US President Donald Trump issued his most forceful criticism of Vladimir Putin regarding the war. Despite the positive momentum, JPMorgan noted that many covered European defence company share prices are already trading above their existing price targets.

Key Decisions for Investors

• Investors should consider the heightened geopolitical tensions and increased defence spending commitments across Europe as strong tailwinds for the defence sector, potentially justifying continued or new exposure to relevant European defence equities.
• Given JPMorgan's assessment that current price targets may be too low and their expectation of near-term outperformance, monitor for analyst forecast revisions, but exercise caution as many stocks have already surpassed existing targets, suggesting careful evaluation of valuations is warranted.
• Closely track developments from the upcoming NATO summit and ongoing geopolitical events, as these are key catalysts that could further influence sector performance and necessitate adjustments to investment strategies in this dynamic environment.