European defence stocks cool as investors reassess war winners

• Major European defence stocks including Chemring Group (down 33%), Rheinmetall (down 10%), and Saab (down 12%) have declined since the Iran conflict started, despite historically rallying during war outbreaks
• The sector's valuation had reached about 29 times forward earnings at the war's outbreak, near record levels, after surging more than 450% since Russia's 2022 Ukraine invasion versus 40% for broader European markets
• The Iran war has highlighted the cost disparity in modern warfare, with Gulf states firing $4 million Patriot interceptors while cheaper drones gain prominence, raising questions about demand for legacy expensive platforms

European Defence Stocks Cool as Investors Reassess War Winners

European defence stocks have experienced a sharp selloff despite ongoing military conflicts, with the MSCI Europe Aerospace and Defence Index dropping 9.2% in March—its largest monthly decline in five years. Major companies including Chemring Group (down ~33% since the Iran conflict began February 28), Rheinmetall and Renk (down ~10%), and Saab (down ~12%) have retreated significantly.

Key Factors Behind the Decline

Stretched Valuations: At the outbreak of the Iran war, the sector traded at approximately 29 times forward earnings, near record highs. Investors engaged in "de-grossing," trimming overcrowded positions amid broader market volatility.

Slower-than-Expected Spending: While European governments committed to increased defence budgets following Russia's 2022 Ukraine invasion, actual contract deployments have been delayed due to fiscal pressures in countries like France and Britain.

Technology Disruption: The Iran conflict highlighted the effectiveness of low-cost drones versus expensive legacy systems. Gulf states fired hundreds of $4 million Patriot interceptors, raising questions about future warfare economics. This has prompted uncertainty about demand for traditional expensive platforms.

Market Context

European defence stocks had surged over 450% since Russia's February 2022 Ukraine invasion, compared to roughly 40% for the broader MSCI Europe index. The recent pullback reflects both profit-taking and reassessment of the "future of warfare."

Long-Term Outlook

Analysts remain fundamentally positive, citing decades of underinvestment requiring capability rebuilding. ETF flows support this view, with $1.32 billion in net inflows to WisdomTree Europe Defence in 2026, including $377 million since the Iran war started. Major players like Rheinmetall are adapting, partnering with firms like Anduril to develop next-generation drone systems.