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 [1][2]. 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 [1][6].

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 [2][1]. 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 [3]. Babcock, meanwhile, features progress in rebuilding its balance sheet and order book, which improves risk/return for investors [2]. 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 [7].

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 [6]. 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 [1].

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 [1]. 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 [6][1].

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?