The FTSE MIB's Breakout and Leonardo's Rally: A Strategic Entry Point for Italian Equities?

The FTSE MIB, Italy’s benchmark equity index, has exhibited a compelling breakout in 2025, rising 1.0% on July 25 alone and surging 19.1 points amid global market turbulence [2]. This upward momentum, emerging from a 12-year base, reflects a confluence of factors: geopolitical tensions, Fed rate cut expectations, and a strategic shift in European defense spending. Meanwhile, Leonardo, a cornerstone of the Italian aerospace/defense sector, has surged 85% year-to-date, driven by a parabolic rise in European military budgets [1]. Together, these developments raise a critical question: Is the FTSE MIB’s breakout and Leonardo’s rally signaling a strategic entry point for Italian equities?

Fed Rate Cuts and the FTSE MIB’s Momentum

The Federal Reserve’s anticipated rate cuts in 2025 have acted as a tailwind for risk assets, including the FTSE MIB. Historically, the index has responded positively to monetary easing, as seen in its rebound to 39,474 points following a temporary U.S.-Iran ceasefire and expectations of lower borrowing costs [4]. With the Fed maintaining rates at 4.25%-4.50% through Q2 2025, market participants are pricing in a 25-basis-point cut by September and up to 75 basis points by year-end [5]. Such easing could further stimulate equity markets by reducing the cost of capital and incentivizing flows into higher-yielding assets like Italian equities.

However, the FTSE MIB’s Q2 performance (-0.74%) underscores lingering volatility, as trade tensions and U.S. tariff announcements initially spooked investors [4]. This duality—between Fed-driven optimism and geopolitical uncertainty—creates a complex backdrop for sector rotation.

Sector Rotation: Defense as a Safe Haven

European political developments have amplified the appeal of the aerospace/defense sector. A coalition of Germany, France, and Italy has pledged to boost defense spending, with NATO’s revised 5% GDP target accelerating demand for military hardware [1]. Leonardo, a key beneficiary, reported a 12.9% revenue increase and 15% EBITDA growth in Q2 2025, reflecting its dominant position in European defense contracts [3].

This sectoral shift is not accidental. As noted in the European Central Bank’s May 2025 Financial Stability Review, aerospace/defense has outperformed trade-sensitive sectors like manufacturing and tourism, which face headwinds from U.S. tariff policies [1]. The sector’s resilience stems from its alignment with strategic priorities: national security, supply chain resilience, and technological sovereignty.

Leonardo’s Rally: A Case Study in Strategic Positioning

Leonardo’s 4.5% surge in early September 2025 highlights its role as a bellwether for the FTSE MIB’s breakout [2]. The company’s Q2 results—16% revenue growth in Q1 2025 and a 10.3% adjusted EBITDA margin—underscore its operational strength [4]. Yet its rally is also a function of macroeconomic tailwinds. As BlackRock observes, volatility in trade-dependent sectors has prompted investors to reallocate capital toward “defensive” industries like defense, where policy-driven demand is more predictable [2].

Leonardo’s legal trademark licensing agreement with its U.S. subsidiary further insulates it from currency risks, enhancing its appeal in a high-uncertainty environment [3].

Strategic Entry Point? Weighing Risks and Opportunities

For investors, the FTSE MIB’s breakout and Leonardo’s rally present a nuanced opportunity. The index’s 12-year base breakout suggests a potential long-term bullish trend, while Leonardo’s valuation—supported by robust EBITDA margins and geopolitical tailwinds—appears compelling. However, risks persist:

1. Regulatory Shifts: Italy’s Consob is tightening climate reporting standards, which could pressure sectors lacking ESG alignment [1].
2. Market Volatility: The FTSE MIB’s Q2 decline (-0.74%) illustrates the fragility of momentum amid trade tensions [4].
3. Fed Policy Uncertainty: While rate cuts are priced in, a delay or reversal could trigger a reevaluation of risk assets.

Conclusion

The FTSE MIB’s breakout and Leonardo’s rally reflect a strategic realignment in European markets, driven by Fed easing and defense-sector tailwinds. For investors, this represents a potential entry point—but one that demands careful stock selection and sectoral diversification. As BlackRock notes, volatility itself can be a catalyst for identifying undervalued opportunities in fundamentally strong companies [2]. However, the path forward is not without risks. Investors must balance the allure of defense-sector growth with the realities of regulatory shifts and geopolitical volatility.

In this context, the FTSE MIB’s breakout is less a binary “buy” signal and more a call to scrutinize the interplay between macroeconomic forces and sector-specific resilience. For those willing to navigate this complexity, Italian equities—particularly in aerospace/defense—may yet offer compelling returns.

Source:
[1] European Defense Stocks Go Parabolic as War Spending Surges [https://www.usfunds.com/resource/european-defense-stocks-go-parabolic-as-war-spending-surges/]
[2] Equity Market Outlook | BlackRock [https://www.blackrock.com/us/individual/insights/equity-market-outlook]
[3] Earnings call transcript: Leonardo's Q2 2025 [https://www.investing.com/news/transcripts/earnings-call-transcript-leonardos-q2-2025-earnings-highlight-strong-growth-93CH-4160917]
[4] Q2 2025 Market Commentary: Equities, Tariffs & ... [https://waterloocap.com/q2-2025-market-commentary/]
[5] Q3 Investment Outlook [https://www.ssga.com/ch/en_gb/intermediary/insights/bond-compass/investment-outlook]