European Defense Stocks Dip Amid Ukraine Peace Talks, Long-Term Growth Intact

The ongoing peace negotiations in Ukraine have temporarily rattled Europe’s defense industry. On November 24, shares of major weapons manufacturers dropped to their lowest levels in over four months, leaving investors debating whether the decline signals a long-term trend or a short-lived market fluctuation.

Defense Sector Stocks Tumble

European defense stocks fell sharply as the SXPARO index, covering aerospace and defense companies, dropped two percent on November 24. Just days earlier, on November 21, shares slid 3.4 percent, marking the largest weekly loss since March.

Despite the short-term slump, European defense companies have been among the year’s top performers. In 2025, the sector helped the STOXX 600 index rise 11 percent, with SXPARO up 48 percent since January. However, recent trading suggests momentum could be slowing. German defense firm Renk lost 3.29 percent, totaling a 24.64 percent drop from the prior week, while Hensoldt shares fell 3.18 percent, down 16.58 percent for the same period. Other notable declines included Rheinmetall (3 percent), Leonardo (1.66 percent), Saab (2.47 percent), and Thales (1.59 percent).

Analysts caution against overinterpreting the drop. Morningstar analyst Loredana Muharreimi described the reaction as exaggerated, noting that fundamentals remain strong. She highlighted that Europe’s defense spending is driven by long-term strategic priorities, not solely by the Ukraine conflict.

Long-Term Boost from Government Policy

Europe’s rising defense budgets have been a key driver of the sector’s strong performance. Between 2023 and 2025, governments added more than 100,000 square meters of new production capacity. In Poland, factories expanded to produce Borsuk infantry fighting vehicles and AHS Krab artillery barrels, while the Czech Republic opened a plant for self-propelled artillery, and Slovakia ramped up production of Patria 8x8 armored vehicles.

Similar programs have taken place in Sweden, Spain, and Norway. The UK, outside the EU, resumed production of 155mm M777 howitzers. As a result, the Goldman Sachs portfolio of European defense stocks grew 120 percent in the first half of 2025.

EU leadership has also fueled optimism. In August, European Commission President Ursula von der Leyen proposed a five- to tenfold increase in funding for the continent’s defense industry, citing the "Russian threat" and the need to equip Ukraine with a modern, well-trained army.

Peace Won’t Halt Defense Investments

The outlook suggests that even if Ukraine peace talks succeed, Europe’s defense sector is unlikely to lose momentum. Fund manager Graham Benke of Amati Global Investors noted that investors increasingly expect a resolution in the coming months, yet the conflict and changing NATO dynamics have permanently reshaped Europe’s defense strategy. Analysts like Alessandro Pozzi of Mediobanca predict no peace deal before the end of 2026, meaning European defense spending will likely continue its upward trajectory.