What a Ukraine peace plan could mean for Europe’s defense boom

Published Thu, Nov 20 20259:11 AM ESTUpdated Thu, Nov 20 20259:23 AM EST

Key Points

European defense stocks have surged this year, buoyed by regional governments committing to ramp up security budgets.
However, questions around how much further the sector can rise have come to the fore in recent days, amid reports the U.S. and Russia have secretly been working on a peace deal for Ukraine.
Market watchers spoke to CNBC about the impact they think a breakthrough on ending the war may have on defense stocks.

The bull run on European defense stocks isn't over, market watchers say — whether or not officials find a way to finally put a stop to the war in Ukraine. On Tuesday, Axios reported that a secret peace deal was being drawn up by Washington and Moscow, with some outlets reporting a breakthrough could be imminent . Some reports suggested, however, that a deal may force Ukraine to make concessions on land that has been taken by Russia since its full-scale invasion in early 2022 , and give up some arms. Ukrainian President Volodymyr Zelenskyy has previously rejected the notion that his country would hand land over to Russia in order to end the war. As rumors swirled this week, U.S. Secretary of State Marco Rubio took to social media platform X to shed some light on progress toward a peace plan for Ukraine. "Ending a complex and deadly war such as the one in Ukraine requires an extensive exchange of serious and realistic ideas," he said in a post late on Wednesday. "And achieving a durable peace will require both sides to agree to difficult but necessary concessions. That is why we are and will continue to develop a list of potential ideas for ending this war based on input from both sides of this conflict." European defense stocks fell after the reports broke, even as European shares broadly showed signs of recovery from a four-day sell-off. Between Monday and Wednesday, the Stoxx Europe Aerospace and Defense index shed 3.8%, before rebounding on Thursday to add more than 2% by early afternoon trade in London. The index has gained more than 50% since the start of the year, as European governments and the NATO military alliance committed to drastically ramp up defense spending. The pledges are widely expected to boost European firms' bottom lines — with regionally headquartered companies already reporting record order backlogs and huge upswings in income . Defense rally Despite volatility this week amid growing reports a peace deal could be imminent, market watchers told CNBC the European defense sector has upside ahead regardless of how long the war in Ukraine drags on. Micheal Field, chief equity strategist at Morningstar, told CNBC on a call that investors should look past the noise and approach defense through a long-term lens. "Their order books are packed full. The restocking story is there," he explained. "Even if the Ukraine War ended tomorrow, it's going to take countries like Germany a decade to restock all the weapons that they've given Ukraine, and that's not including all the other bad stuff that's happening in the world." According to the Kiel Institute's Ukraine Support Tracker , which was last updated in October, EU countries and institutions have collectively allocated more than 65 billion euros ($74.8 billion) to military support for Kyiv. Germany alone has allocated 17.7 billion euros, according to the data. Field also pointed to European countries gearing up for a security splurge, which Morningstar sees further benefiting big names like Germany's Rheinmetall — which has already seen its stock more than double in value this year — and Britain's BAE Systems . "There's a huge amount of structural tailwinds affecting the industry," he said. "It's a medium to longer term story, not a short-term story — and we don't think the market is given full credit to that yet." Field argued that despite the huge growth seen among Europe's defense primes this year, the stocks had further to run. "These aren't like AI names, it's a physical product they're selling, so it's hard to conceptualize how they're worth so much more today than they were a year ago," Field said. "[But] If I look through the vast majority of names, they're all still very attractive at this point." Bill Farmer, managing director at investment bank Brown Gibbons Lang & Company, said any sort of deal would likely cause some short-term volatility in the sector, but it was unlikely to completely set defense companies on a new trajectory. "The remote chance of a long-term peace deal could initially pause the rally in NATO defense stocks and potentially slow down order and production of various missiles/weapons," Farmer told CNBC in an email on Thursday. "However, I believe that NATO countries are committed to increasing defense spending along the lines of 5% of GDP. This increase would help to deter future offensive actions by the likes of Russia, Iran and China." "Any slow-down in production orders will likely shift the focus to funding modernization of supply chains and capabilities thus creating a new avenue of investment," Farmer said. Meawnhile, Claire Titmarsh, defense equity analyst at Rathbones, told CNBC that the impact of a peace agreement would depend on the terms of the deal. "Given Russia's current posture, a deal that fully removes the risk of future aggression appears unlikely," she said. Analysts have previously told CNBC that European countries will continue to feel the need to defend themselves against Russia long after the war in Ukraine is over. "I have a hard time seeing, after all that happened with the invasion in Ukraine and the aggressive neighbor that we have to the east … even if we get a ceasefire or peace deal that is reasonable with Ukraine, that [governments] would step back and say it's over," Micael Johansson, CEO of Swedish defense giant Saab , said in an interview with CNBC toward the end of July. Regardless of the outcome, however, Titmarsh said the structural drivers behind European defense spending would remain intact. These include decades of underinvestment, the push for strategic autonomy, modernization needs, and NATO's commitment to hike defense spending targets, she said. "Recruitment challenges are also accelerating investment in automation and unmanned systems, ensuring sustained demand for defense capabilities independent of a possible Russia-Ukraine peace deal," she added.