Why JPMorgan Sees UK Aerospace & Defence Stocks Poised for Major 2025 Earnings Surge

JP Morgan’s latest research reaffirms its bullish outlook for the European A&D sector. While recent market weakness has triggered concern, the bank treats current softness in civil aerospace and sharper corrections in defence names as opportunity rather than turning points—for long-term investors. The driver is dual: in civil aerospace, normalization of capacity and aftermarket trends; in defence, widening budgetary commit ments in Europe and governments’ desire to onshore both production and technological innovation.

The bank’s “Positive Catalyst Watch” includes Rolls-Royce and Babcock among four UK names—Rolls-Royce, Babcock, MTU, and Leonardo—expected to outperform consensus in the second half of 2025. Rolls-Royce specifically is gaining from increased wide-body flying hours, gains in aftermarket strength, improved engine durability and maintenance margins, along with raised guidance for profits and free cash flow. Babcock, meanwhile, features progress in rebuilding its balance sheet and order book, which improves risk/return for investors. MTU Aero Engines has also lifted its 2025 outlook, expecting low- to mid-twenties percentage growth in operating profit, underpinned by strong demand and favorable exchange rates.

From an earnings perspective, JP Morgan estimates for civil aerospace EPS growth for the six ECA (European Civil Aerospace) names covered are in the range of roughly 17-56% in 2025; for European Defence Sector (EDS), average EPS growth is forecast at ~16% in 2025. Additionally, aftermarket engine demand is expected to stabilize at 8-10% annually through 2026-2029, with volume growth around 4% and price increases in the 4-6% range for those years.

However, caution is warranted. Currency shifts are already starting to bite: the U.S. dollar has depreciated ~8% against the pound sterling and ~14% versus the euro YTD, generating headwinds for firms with USD-denominated revenues. Meanwhile, risks remain over whether supply chain constraints and procurement delays could offset upside. Also, valuations are not cheap—investors will need to assess forward earnings contra currency and geopolitical exposure carefully.

Strategic Implications:

• Investors could use weakness to accumulate select UK and German A&D names with strong catalyst visibility—Rolls-Royce, Babcock, MTU, Leonardo among them.
• Exposure to civil aero aftermarket could provide stability vs. reliance on new deliveries, which are more cyclical and recoil-sensitive.
• Corporate strategies—cost discipline, margin expansion, engine uptime metrics (e.g. time-on-wing)—will distinguish winners.
• Monitoring of government budget trajectories (UK Strategic Defence Review, German defence spend, etc.) will be critical; upside tied heavily to sustained policy support.

Open Questions:

• Will supply chains keep pace with delivery schedules and aftermarket demand, or will material/labor bottlenecks reintroduce slippage?
• How far will FX pressures clip profitability, especially for UK- and Euro-based firms with significant dollar exposure?
• What is the risk to defence spending if political priorities or fiscal constraints tighten beyond expectations?
• To what degree will valuation multiples adjust as earnings beat estimates—or disappoint?