Morgan Stanley is preparing investors for broadly resilient results from European aerospace and defence companies in the 2025 financial year, while adjusting its preferred holdings across both subsectors.
The bank's analyst, Ross Law, told clients that he sees "limited appetite for conservatism" in upcoming results and argued that commentary from company management on prospects for 2026 will likely be more consequential than the raw FY25 headline numbers.
Aerospace views
Within aerospace, Law identifies Rolls-Royce as the company "best placed to exceed expectations." That view is underpinned by the prospect of a medium-term guidance upgrade and a new buyback policy, with the U.K. engine maker elevated to Morgan Stanley's top Aerospace pick on the back of potential upside from capital returns and a recovery in aftermarket performance.
Airbus is also expected to show continued progress on increasing production rates. Law projects FY26 delivery guidance at about 900 aircraft and highlights a potential share repurchase announcement as "the key upside risk." He further notes that Airbus should be able "to demonstrate further progress on the ramp-up in 2026, supported by improving supply chain performance, with delivery guidance likely derisked by the slippage of 25-30 aircraft from 2025."
Defence outlook
On the defence side, Morgan Stanley sees the sector's robust start to the year as driven more by a recovery from late-2025 weakness and by heightened geopolitical tensions than by overstretched earnings expectations. Law is constructive on Defence for 2026, stating the industry appears to be moving "from commitments to contracts," as larger European defence budgets translate into stronger order momentum and clearer earnings visibility.
Rheinmetall retains the firm's top spot in Defence, where Morgan Stanley points to distinct order catalysts and what it regards as attractive valuation levels. BAE Systems is also a favored pick due to its diversification across geographic markets and programmes, although Law cautions the company may take a conservative tone when guiding for FY26.
Leonardo remains among the recommended names, supported by continuing self-help measures and the prospect of an Aerostructures transaction still pending. Separately, Morgan Stanley has upgraded Hensoldt to Equal-weight from Underweight, citing "a resetting of expectations and derating of the shares."
The repositioning reflects the firm's view that most companies in the sector are positioned to meet or beat FY25 forecasts, but that the decisive driver for equity performance will be management signals about 2026 and the conversion of commitments into signed contracts in the defence arena.