Deutsche Bank downgraded three major European defense contractors on Tuesday, citing sector weakness and regional uncertainties. Analyst Christophe Menard cut BAE Systems to "hold" from "buy," lowering its target price to 2140p. He pointed to disappointing Maritime margins that fell to 6.5% versus an 8% guide, which overshadowed stronger Air and Cyber & Intelligence performance.

Despite expecting £1.5 billion in free cash flow, BAE remains below consensus estimates. The bank also reduced Leonardo to "hold" from "buy," keeping its €57 target. Menard sees opportunities but limited valuation upside until strategic initiatives formalize and cash flow improves. Thales faced the steepest downgrade, moving to "hold" from "buy" with a €280 target.

The analyst highlighted France's budget crisis, noting Parliament failed to pass a 2025 budget. Defense spending could be capped at 2025 levels, a scenario the French Defence Minister called "catastrophic" given urgent NATO obligations. Deutsche Bank raised several other names, including Airbus, Rolls-Royce, and Safran, to "buy," expecting valuations to stay elevated but with limited further re-rating due to geopolitical conflicts and spending disparities.