Morgan Stanley points out the reasons for investment in EU defense.

Since the outbreak of the conflict in the Middle East, European defense stocks have underperformed in the past few months, with increased volatility. However, Morgan Stanley stated that the investment rationale for this sector is more compelling than ever. After a strong start in 2026, European defense stocks are currently trading on average about 20% lower than recent highs. Valuations have decreased, with forward price-to-earnings ratios dropping from nearly 23 times to around 20 times. The bank believes that this pullback is not in line with fundamentals and provides an attractive entry point. Analysts, including Ross Law and Marina Zavolock, wrote: "Recent geopolitical events have strengthened the case for increased defense spending in Europe and enhancing strategic autonomy." Morgan Stanley stated that the market weakness is mainly driven by sentiment and positioning, with this sector being caught up in a broader risk-on rotation in stocks.