JP Morgan has highlighted BAE Systems PLC (LSE:BA.) and QinetiQ Group PLC (LSE:QQ.) as two of the most attractive stocks in the European defence sector, citing the potential for a stronger US defence budget under a Trump administration.
The investment bank’s latest research note, which comes ahead of BAE's results next Wednesday 19 February, outlines the mixed signals currently facing the sector.
Reports of Russia-Ukraine ceasefire talks and uncertainty over US policy could weigh on sentiment in the near term. However, rising European defence spending and the possibility of increased US military funding provide a more positive long-term outlook.
JP Morgan expects defence-related news to intensify in the coming days, particularly with the Munich Security Conference taking place from 14 to 16 February. The event is likely to set the tone for future military spending across Europe.
The bank suggests that stocks with lower exposure to Ukraine and the US defence market, such as Leonardo, Thales, and Babcock, may prove more resilient in the short term.
Progress towards Ukraine ceasefire
Meanwhile, Rheinmetall could present a buying opportunity if its shares pull back on any progress towards a ceasefire in Ukraine.
Looking ahead, JP Morgan sees April 2025 as a key moment for the sector.
If Donald Trump, should he return to the White House, pushes for a robust US defence budget, this could boost demand for European defence contractors. BAE Systems and Qinetiq are well positioned to benefit, given their strong links to the US military and advanced technology capabilities.
For now, the European defence sector remains in flux, with geopolitical developments set to drive investor sentiment in the weeks ahead.