European defense shares drop amid reassessment of sector

Investors are cooling on European defense stocks as profit-taking and stretched valuations collide with growing uncertainty over the future of warfare. The MSCI Europe Aerospace and Defence Index dropped 9.2% in March, marking its most significant monthly decline in five years as a previously dominant trade began to unwind. While defense equities typically rally at the onset of conflict—as seen following the full-scale invasion of Ukraine by Russia in 2022—the recent escalation involving Iran has prompted a different market reaction.

"There has been quite a lot of de-grossing as financial institutions and retail investors have looked to reduce exposure amid increased uncertainty," said Martin Frandsen, portfolio manager at Principal Asset Management.