European defense shares have cooled noticeably in 2026 following a multiyear ascent, with investor caution driven by concerns over procurement timings, public budget pressures and what many see as stretched valuations. Despite the pullback, Barclays contends that the longer-term cycle of defense spending across Europe remains intact and that portions of the sell-off look overdone.
The brokerage highlights two names it judges best positioned to benefit as NATO-related spending rises and as order books convert into revenue and cash: Rheinmetall and Leonardo. Barclays argues each firm brings distinct advantages - robust backlog visibility, exposure to key product categories and improving earnings trends - that underpin its continued constructive stance.
Rheinmetall
Barclays identifies Rheinmetall as a clear beneficiary of Europe's rearmament efforts despite near-term share weakness. The firm notes market sentiment swung excessively negative after a softer first quarter, even though Rheinmetall reiterated full-year guidance and flagged a substantially stronger second quarter ahead.
The elements Barclays singles out are Rheinmetall's large order backlog, meaningful exposure to ammunition and military vehicles, and a capacity to maintain margins that lead the sector. From the brokerage's perspective, the current share valuation does not fully incorporate the company's longer-term earnings potential, especially in an environment of rising defense budgets across Europe.
On that basis Barclays maintains an "overweight" rating on Rheinmetall and expects earnings momentum to improve through the second half of the year.
Leonardo
Barclays regards Leonardo as the standout near-term momentum story within European defense. The company delivered a solid first quarter characterized by strong profitability, robust free cash flow and healthy order intake, with its backlog rising to record levels.
The brokerage sees further upside from initiatives including portfolio simplification, defense partnerships and new growth programs tied to aerospace and military platforms. Barclays also believes Leonardo's current guidance is conservative and that it could be upgraded later this year if the recent trends persist.
Relative to peers, Leonardo trades at a more moderate valuation even as earnings accelerate, which Barclays says leaves room for a potential re-rating. For these reasons Barclays keeps an "overweight" rating on the stock and views the risk-reward as attractive.
Bottom line - Barclays views the recent sector correction as excessive in certain names and retains a constructive stance on Rheinmetall and Leonardo based on backlog strength, product exposure and improving earnings and cash flow dynamics. The brokerage expects more visible earnings momentum in the second half for Rheinmetall and potential upside to Leonardo's guidance if current trends continue.