JP Morgan Highlights BAE Systems and QinetiQ as Top Picks in European Defense Sector

2025-03-02

JP Morgan has identified BAE Systems PLC (LSE:BA.) and QinetiQ Group PLC (LSE:QQ.) as two of the most attractive stocks in the European defense sector, citing the potential for a stronger U.S. defense budget under a potential Trump administration. The investment bank’s research note, released ahead of BAE Systems’ results on February 19, highlights mixed signals facing the sector. Reports of Russia-Ukraine ceasefire talks and uncertainty over U.S. policy could weigh on sentiment in the near term. However, rising European defense spending and the possibility of increased U.S. military funding provide a more positive long-term outlook.

JP Morgan expects defense-related news to intensify in the coming days, particularly with the Munich Security Conference taking place from February 14 to 16. The event is likely to set the tone for future military spending across Europe. Stocks with lower exposure to Ukraine and the U.S. defense market, such as Leonardo, Thales, and Babcock, may prove more resilient in the short term. Meanwhile, Rheinmetall could present a buying opportunity if its shares pull back on any progress toward 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 U.S. defense budget, this could boost demand for European defense contractors. BAE Systems and Qinetiq are well positioned to benefit, given their strong links to the U.S. military and advanced technology capabilities. For now, the European defense sector remains in flux, with geopolitical developments set to drive investor sentiment in the weeks ahead.

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