Market Update 21st June 2025

Only Fools Rush In

For my troubles I have been proofreading the Hawksmoor AIM team’s daily research note a few times last week. They have a couple of defence stocks in there which both reported good results.

The defence sector has been performing extremely well over the last few years, including the two AIM stocks. But on the results last week, one went up and one went down. Longer story short the one that went down is more US focused and despite strong results expressed some caution about the outlook. The one that went up is more European focused and on top of similarly strong results they are more optimistic about the future.

It seems a long time ago, but since Russia invaded Ukraine in February 2022 the global Aerospace & Defence Sector is up about 120%. You might remember Russia had this idea it was all going to be over in a few days.

Some individual defence stocks are up considerably more – most obviously Rolls-Royce has risen nearly 900% since the day of the invasion. I imagine my step-father will be turning in his grave. He once recommended Rolls-Royce shares to his brother. They did not do so well at the time and despite many other successes, his brother never seemed to quite forgive him for this one. All too late now.

We are several years into this cycle and the two AIM stocks demonstrate the nuance and differentiation between different stocks that builds up over time. Different valuations and different expectations that are reflected in those valuations.

Money has been pouring into Aerospace & Defence ETFs recently. I met one well known ETF provider last week who was keen to stress they were “first to market” with their product on March 11^th. 2025.

It now has €3bn in it and Factset shows a p/e of 44.4x. Top holding is German defence company Rheinmetall at almost 15% of the fund on 63x 2025 earnings.

It matters what you do is all I’m really getting at. I’m not sure you are getting that nuance through an ETF and things aren’t as simple as just buying the market, but I think the apparent simplicity of the ETF is part of the appeal.

The incredibly strong performance of both Roll-Royce and British Aerospace has led to some concentration in performance in the UK. Banks are another sector which has been producing outsized returns in both the UK and Europe.

On Thursday we met a UK equity fund we like, which has been gently but not disastrously underperforming. They have attribution analysis showing most of this is explained by a handful of companies they don’t own – retail banks and UK defence companies which are not in their universe.

Everyone is well aware of the concentration at the top of the US equity market, but it was brought home to me again in a chart I saw last week which showed forward earnings estimates for the top 10 US stocks had doubled over the last few years, while the other 490 in the S&P 500 had stayed flat. It’s not just the growth of the top companies in the market that matters, it is the contrast with the scarcity of it in the rest of the market as well.

It seems to me that signs of concentration are popping up in many places and I’m not sure if this is a coincidence or a trend.

George wrote last week about a 10% reduction in UK earnings estimates being mostly explained by a handful of commodity related companies. I met another UK fund manager who didn’t even believe me when I tried to tell him UK earnings estimates were down 10%. He said his portfolio estimates were up. I guess he doesn’t own commodity stocks.

It receives less attention but the European market is also concentrated at the top end. GRANOLAS never quite became a thing like the Mag 7, but if anything the European market is slightly more concentrated than the US with 39% in the top 10 vs 37%.

Market concentration levels are part of the reason index trackers have become so popular. The narrower the market the more difficult it is to beat. But like most things, this goes in cycles and is unlikely to last – there are already signs of it dissipating.

A higher number of stocks have been outperforming the S&P 500 for example in the US and market performance has been broadening out, as well as of course many international regions have outperformed the US year to date in 2025.

Europe has done especially well, but here the concentrated top 10 is not really leading the index. Outside of a 61% gain for Santander, the largest European stocks are up just 4% YTD vs around 12% or so for the wider market. It has paid to be more active in Europe.

Robert Fullerton – Senior Research Analyst

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