3 ways the pros are trading, including why one manager continues to back European defense stocks

Strategists highlighted three relative-value opportunities: European equities seen with about 5% upside, select European sectors trading at 20% to 25% discounts to fair value, and emerging markets benefiting from a sharp improvement in fundamentals. Defense spending is described as a 10- to 15-year mega trend, while weaker U.S. dollar conditions are aiding European companies. The piece is largely constructive commentary rather than a catalyst-driven market event, with IPO activity and private-market allocation also flagged as portfolio themes.

Analysis

The market setup favors a rotation from crowded U.S. large-cap leadership into cheaper, policy-sensitive cyclicals and ex-U.S. beta. The key second-order effect is that dollar weakness does not just help translated earnings in Europe; it also tightens financial conditions less for foreign borrowers and improves the relative attractiveness of non-U.S. assets to global allocators, which can create a self-reinforcing flow backdrop over the next 1-3 months.

Europe’s opportunity is less about a broad index rerating and more about dispersion. Defense and healthcare offer different catalysts: defense has a multi-year backlog/CapEx cycle with low cancellation risk, while healthcare is a valuation catch-up trade that can work even if growth stays modest. The underappreciated risk is that if the dollar stabilizes or U.S. growth re-accelerates, this trade likely compresses first through multiple expansion rather than earnings, so entry discipline matters more than the thematic story.

Emerging markets may be at the earliest stage of a mean-reversion regime, but the more important tell is positioning: after years of underownership, even modest inflows can have outsized price impact because liquidity is thinner and local markets are more rate-sensitive. The contrarian read is that consensus is still treating EM as a GDP story, when the cleaner trade is a liquidity/ownership reset; that argues for a basket approach rather than single-country macro bets. IPO enthusiasm is a separate but related signal: risk capital is returning, which could support private assets and high-duration growth, but it also raises the chance that public-market incumbents face valuation pressure from new issuance and capital allocation shifts.

Key Decisions for Investors

• Go long EWG or EZU vs SPY for a 6-12 week trade: express the view that capital rotates into Europe as the dollar weakens. Risk/reward is attractive if the euro stabilizes; stop if DXY reclaims its recent range highs.
• Pair trade: long PHLX defense exposure (e.g., ITA) / short a European consumer discretionary basket for 1-3 months. Defense has multi-year visibility; discretionary is most vulnerable if rates stay volatile and real incomes soften.
• Buy a basket of EM equities via EEM or IEMG on pullbacks over the next 2-4 weeks, with a 3-6 month horizon. Use a shallow stop because the upside is driven by reallocation flows rather than immediate earnings inflection.
• Add selective healthcare exposure in Europe or U.S. large-cap defensives on weakness, preferring names with earnings durability over narrative growth. The setup is for multiple catch-up, not explosive top-line acceleration, so take profits into any 10-15% rerating.
• Keep dry powder for late-stage private/IPO-related dislocations; avoid chasing first-day hype in new listings. If public comparables sell off on issuance, use that as a better entry point for quality growth rather than paying up into the deal cycle.