Morgan Stanley analyst Ross Law anticipates most European aerospace and defence companies will meet or exceed FY25 earnings forecasts. He suggests management commentary on 2026 will be more critical than the immediate results. Law has reshuffled his preferred stocks, influenced by geopolitical tensions and rising defence budgets across Europe, signaling a shift from commitments to contracts.

In aerospace, Law favors a U.K. giant, anticipating it to outperform expectations, buoyed by capital returns and improved aftermarket performance. He also expects further progress on production ramp-up. The analyst’s outlook highlights a focus on share repurchase announcements. This reflects a positive view on the sector's medium-term prospects.

For defence, Law remains bullish, emphasizing the sector's move from commitments to contracts amid higher European defence budgets. The firm's top pick in defence benefits from clear order catalysts and an attractive valuation. Other firms are also favored for their diversification.

The analyst upgraded a specific stock to Equal-weight from Underweight, citing a resetting of expectations. Investors should watch for the FY25 earnings reports and management's guidance for 2026 to gauge the sector's trajectory. These reports will be critical for understanding the health of the sector.