JPMorgan Highlights Split in European Defense, Favoring Firms With Durable Technology

JPMorgan has identified a growing divergence in the European defense sector, with investors favoring companies that possess long-duration order books and difficult-to-replace products over those whose technology is at risk of being displaced. In a research note published Wednesday, the bank highlighted its top ideas for the fourth quarter, noting the sector has underperformed local markets by an average of 6% this year.

A Sector Divided by Technology

According to JPMorgan analyst David Perry, investors are rewarding defense firms with durable, long-term competitive advantages. The bank reiterated its Overweight ratings on BAE Systems, Leonardo, and Babcock, citing these defensive characteristics.

Conversely, the note explained that companies such as Rheinmetall, CSG, and Renk have been significantly de-rated by the market due to fears of technological disruption. "The debate over technology displacement is complex and the answer will not be clear for many years," Perry wrote, adding that upcoming investor events for Rheinmetall on Nov. 27 and Renk on Dec. 8 will be important for the companies to make their case.

Key Analyst Calls and Catalysts

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JPMorgan also updated its ratings and outlook on several key players ahead of specific corporate events:

• MTU Aero Engines: Placed on Positive Catalyst Watch ahead of its Nov. 30 capital markets day. The bank noted the stock has lagged competitors due to the GTF engine recall, which cost about $1 billion, but expects the recall to be largely completed by the end of 2026.
• Leonardo: Also placed on Positive Catalyst Watch before its industrial plan update in March 2027, where JPMorgan anticipates higher cost savings and margin targets will be announced.
• Rheinmetall: Placed on Negative Catalyst Watch. While the bank does not expect the company to cut its 2030 sales target of €50 billion, JPMorgan's own forecast is significantly lower at €36.9 billion, and it sees a potential shift in product mix lowering earnings.

Broader Market Outlook

Beyond these specific calls, the JPMorgan note indicated that Rolls-Royce and Safran should remain strong performers over the medium term. Perry described both aerospace and defense giants as "core holdings" for investors in the sector.