Bank of America Securities says the recent sharp retreat in European defense shares has created a potentially attractive entry point, noting that the sector has undergone a pronounced de-rating over the past three months.
According to the brokerage, the sector’s valuation premium over the STOXX Europe 600 has fallen dramatically as German order volumes failed to match elevated expectations and several 2026 outlooks — including Hensoldt’s — disappointed. Defense stocks, which had previously traded at a 120–130% premium following the Munich announcements and NATO’s 3.5% GDP target, have now dropped back to about a 70% premium to the SXXP.
BofA highlighted that European defense companies are currently valued at 11.6x EV/EBIT based on 2028 estimates, with zero net leverage at a sector level — a setup the firm considers “highly attractive if defence budget growth persists.” It added that long-term spending trends remain supportive and that the sector’s pullback represents an “attractive entry point.”
The brokerage noted that valuation swings have been substantial: from an early-2025 premium of 36%, to a post-NATO surge, and now a meaningful retracement. Prior to COVID-19, the sector typically traded at a 20% premium during budget expansions and a 20% discount in downturns, while the war in Ukraine pushed valuations into elevated ranges of 20–50% premia.
Despite the pullback, BofA remains constructive on the fundamentals. It forecasts average organic revenue growth of roughly 12.5% from 2025 to 2030, around 280 basis points of margin expansion, and an EPS CAGR near 20%. If NATO members were to raise defense spending to 3.5% of GDP, the bank estimates an additional $310 billion in demand — or about $187 billion at a 3% target compared with 2025 levels.
Looking ahead, BofA expects 2026 to set a record for book-to-bill ratios as European governments continue rebuilding defense manufacturing capacity. Companies have also indicated that growth is likely to accelerate between 2027 and 2029 as new capacity comes online.
Although diplomatic negotiations continue — with the Financial Times recently reporting Ukraine’s agreement to a clause capping peacetime troop levels at 800,000 — BofA said a cease-fire would not alter its long-term view of European defense expenditures. In its assessment, the recent selloff reflects expectations of stabilization rather than renewed acceleration, and current valuations do not fully account for the growth it projects.
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