Analysis-European defence stocks cool as investors reassess war winners

European defence stocks have cooled after a sharp rally, as investors trimmed crowded positions and reassessed the sector’s outlook following the outbreak of the Iran conflict. MSCI’s Europe Aerospace & Defence Index fell 9.2% in March, driven by profit-taking, stretched valuations (around 29x forward earnings) and concerns that cheaper technologies like attack drones reduce demand for legacy platforms. Individual names such as Rheinmetall, Renk and Saab slid roughly 10-12% while Czech arms maker CSG lost almost a third. Despite the pullback, analysts say long-term fundamentals remain intact with rising government defence budgets and selective buying: LSEG shows $1.32bn of net inflows into the WisdomTree Europe Defence ETF so far in 2026. Overall the piece frames a short-term correction and mixed near-term sentiment amid longer-term bullish structural drivers for defence spending.