European defense stocks are flashing warning signs after a powerful run. Deutsche Bank AG analysts now suggest the sector may be nearing a valuation peak, offering a rare contrarian take on an industry that has surged over 20% this year. The rally stems from a simple reality: Russia's invasion of Ukraine forced a fundamental shift in continental security thinking. Governments from Berlin to Warsaw scrapped long-held fiscal restraint, launching multi-billion euro spending programs to modernize aging militaries.

Shares in armaments manufacturers responded with steep gains, reflecting expectations for years of robust order books. Deutsche Bank's caution introduces a critical question for investors: has the good news been fully priced in? While geopolitical tensions remain high, the pace of spending increases may not accelerate further from here. Valuations in the sector have expanded rapidly, leaving little room for earnings disappointments or any easing in the conflict.

Investors who missed the initial rally must now weigh whether to chase stocks at current levels or wait for a pullback. The debate centers on whether the rearmament cycle has more room to run or if the market has already moved too far, too fast.