Deutsche Bank analysts have issued a contrarian warning that European defense stocks may be approaching a valuation peak after surging more than 20% year-to-date, positioning themselves among the few bearish voices on a sector that has benefited enormously from geopolitical tensions (Bloomberg).
Valuation concerns
A Goldman Sachs basket of Europe's defense names has risen almost 23% so far in 2026, driven by rising US threats toward Greenland and military spending plans (Bloomberg).
Deutsche Bank expects European defense valuations to remain elevated at 16x-20x EV/EBIT Y+1, but further re-rating is unlikely due to conflicting geopolitical drivers and persistent regional spending disparities (Investing.com).
The analysts downgraded BAE Systems, Leonardo, and Thales, citing weak Maritime margins, French budget uncertainty, and limited near-term upside (Investing.com).
Regional budget pressures
France's Parliament did not pass a budget in December 2025, leaving FY26 defense spending potentially capped at 2025 levels—a scenario described as "catastrophic" by the French Defence Minister given urgent military needs to meet NATO obligations by 2035 (Investing.com).
Meanwhile, Morgan Stanley's Lisa Shalett emphasized that non-Magnificent Seven stocks face a "burden to deliver" on earnings expectations, recommending active stock selection over passive index exposure (bloomberg).
Market analysis
Trading recommendation: Consider taking profits on overweight European defense positions (Rheinmetall, BAE Systems, Leonardo) and rotating into more attractively valued industrials. For AI exposure, focus on quality names with proven revenue streams rather than speculative infrastructure plays. Implement covered call strategies on extended defense positions to generate income while maintaining upside participation.