European defense companies are asking investors to remain confident in the sector, even as hopes for a peace deal between Russia and Ukraine triggered a short-term selloff in defense stocks.
Markets reacted after U.S. President Donald Trump said negotiators were closer than ever to ending the conflict. However, industry leaders say the long-term need for military spending in Europe remains strong.
Defense Stocks Fall on Peace Optimism
European defense stocks declined on Tuesday as investors responded to news that peace talks between Russia and Ukraine were progressing.
The Stoxx Europe Aerospace and Defense index dropped 1.8%. Major companies such as Saab, Leonardo, and Rheinmetall saw losses ranging between 3% and 5%. This extended a broader pullback that began earlier in the week.
Despite these market movements, defense executives believe the selloff is driven more by sentiment than by real changes in business fundamentals.
Companies Say Russia Remains a Long-Term Threat
German defense firms Hensoldt and Renk told CNBC that Europe still faces serious security risks, even if a peace deal is reached.
A spokesperson for Hensoldt said that a pause in fighting could allow Russia to rebuild its military strength. From a European security standpoint, the threat would remain and could even grow stronger.
“Defense readiness is still a long-term necessity for Europe,” the spokesperson said.
Hensoldt added that its exposure to Ukraine accounts for only a small portion of its revenue. Most of its growth comes from long-term defense programs in Germany and across Europe, many of which extend well beyond 2026.
Long-Term Contracts Support Future Growth
Similarly, Renk — which supplies vehicle systems to more than 70 armies worldwide — acknowledged that defense stocks often face volatility when peace talks make headlines.
However, the company stressed that European NATO members have committed to raising defense spending to 3.5% of GDP through 2035. This commitment creates a strong and stable growth outlook for defense contractors.
Renk noted that recent share price declines do not reflect changes in demand or order backlogs.
Analysts Call the Selloff Overdone
Market analysts agree that investors may be misjudging the situation.
Christopher Granville of TS Lombard said markets are pricing in a “peace dividend” that is unlikely to exist. According to him, even if the war ends, Europe will continue to invest heavily in defense to rebuild stockpiles and improve military readiness.
“There will be no peace dividend,” Granville said, adding that defense spending will remain elevated for years.
Structural Drivers Still in Place
Michael Field, chief equity strategist at Morningstar, said the Ukraine war exposed long-standing weaknesses in Europe’s defense capabilities.
As a result, NATO spending targets have increased and will not be reversed. Countries like Germany may take a decade or more to replace weapons already sent to Ukraine, supporting ongoing demand for defense equipment.
Defense analyst Claire Titmarsh also warned that any peace agreement may not be stable.
“The risk of aggression is unlikely to disappear completely,” she said, noting Russia’s unpredictable behavior and Europe’s push for greater strategic independence from the U.S.
Conclusion: No End to Defense Spending Momentum
While hopes for peace are positive from a humanitarian perspective, defense leaders argue that Europe’s security challenges are far from resolved.
Long-term contracts, higher NATO spending, and continued geopolitical uncertainty suggest that European defense companies still have strong growth prospects. For investors, the recent dip may reflect short-term emotion rather than a lasting change in the sector’s outlook.