European defence: Strong fundamentals behind a soft market

European defence has been one of the defining investment themes of recent years. Russia's full-scale invasion of Ukraine forced a wholesale reassessment of European security. Since then, the continent's defence primes have been at the centre of a structural rearmament story. Order books have surged. Production capacity has expanded. Long-duration procurement contracts have multiplied. A policy architecture has taken shape that continues to deepen the demand underpinning the sector, with NATO's 5% GDP target, the EU's Readiness 2030 programme and Germany's multi-decade Bundeswehr modernisation.

Yet despite this backdrop, European defence equities have retreated meaningfully from their highs. For investors, this raises a natural question: if the fundamentals are intact, why are prices falling? The answer lies not in the fundamentals but in a convergence of sentiment-driven forces. The pattern is a familiar one: markets tend to rally defence stocks in anticipation of conflict or spending acceleration, then sell off once the event arrives. It happened after Russia's invasion of Ukraine in 2022. It is happening now, following US–Israeli military action against Iran. Revenue recognition in defence is slow, companies book orders months or years before delivery and when conflict escalates, markets initially price in future earnings, then pull back when they realise those earnings may be years away. Since the start of the war, inventories have fallen by 246 million barrels (mb) by end-April 2026. Excluding oil trapped in the Middle East Gulf, the draw is even larger at 378mb over the same period.

Read the full analysis to discover why European defence fundamentals remain strong despite recent market volatility.