Europe defence stocks cool

European defence stocks have cooled after a long rally, as investors question whether the next wave of military spending will favor drones over traditional weapons makers. (uk.finance.yahoo.com) MSCI’s Europe Aerospace and Defence Index fell 9.2% in March, its biggest monthly drop in five years, according to Reuters. Since the Iran conflict began on February 28, shares in Czech arms maker CSG have fallen almost a third, while Rheinmetall and Renk are down about 10% and Saab about 12% lower. (uk.finance.yahoo.com) The pullback came after a huge run-up. Reuters said European defence stocks had risen more than 450% since Russia’s full-scale invasion of Ukraine in February 2022, compared with about 40% for the broader MSCI Europe index. (uk.finance.yahoo.com) Investors are now separating “more defence spending” from “every defence stock goes up.” Reuters reported that low-cost drones used in the Iran conflict have sharpened doubts about how much new procurement will flow to companies best known for tanks, artillery and other heavy systems. (uk.finance.yahoo.com) That debate is colliding with government policy that still points to bigger budgets. A European Parliament briefing on the European Commission’s ReArm Europe Plan said the package, presented in March 2025, aims to mobilise more than €800 billion in defence spending, including a new €150 billion loan instrument for joint procurement. (europarl.europa.eu) The Commission also said average European Union defence spending has climbed to the North Atlantic Treaty Organization target of 2% of gross domestic product, but warned that the extra money has “only to a limited extent” benefited European manufacturers so far. It said collaborative buying and sourcing inside Europe would be needed to build production capacity. (politico.eu) Some companies are still telling investors demand is strong. CNBC reported on March 12 that Leonardo laid out a plan to double profits by 2030, while Rheinmetall said it expected 2026 sales growth of 40% to 45% and pointed to record order backlogs. (cnbc.com) But even upbeat forecasts have not guaranteed rising share prices. CNBC said Rheinmetall stock fell 8% after that guidance, with a Jefferies analyst calling the outlook “realistic but soft” for a company whose shares had already risen 1,700% since the start of 2022. (cnbc.com) The split is showing up inside the sector itself. CNBC described Leonardo as pushing deeper into defence electronics and air-defence networks, while Rheinmetall remains more exposed to land systems such as tanks and ammunition, and BAE Systems and Saab keep broader portfolios across aircraft, ships and missiles. (cnbc.com) For now, the market is treating Europe’s rearmament as a more selective trade than it looked a few months ago. Governments are still preparing to spend more, but investors are asking which companies fit a battlefield where a cheap drone can threaten far more expensive hardware. (uk.finance.yahoo.com)