Both Putin and Zelenskyy signaled support for US-brokered peace talks last week, with envoy Steve Witkoff shuttling between Oslo and St. Petersburg. Russia’s Kremlin said Putin conveyed “in principle” willingness to negotiate, and both leaders backed a proposed November meeting. Markets reacted the way they always do on ceasefire headlines: a Goldman Sachs basket of European defense shares slid. Rheinmetall, Hensoldt, and Leonardo all fell hard.
That reaction is wrong, and the reasons why are more important than the peace process itself.
The Market Context
The reflex sell-off treats Ukraine as the engine of European rearmament. It is not. Ukraine was the ignition. The engine is a decade-long structural commitment that was ratified before any ceasefire was conceivable.
At the 2025 Hague summit, NATO allies agreed to a new 5% of GDP defense spending goal by 2035, consisting of at least 3.5% for core defense and up to 1.5% for defense- and security-related projects. That target is not aspirational. Multiple allies already exceed the 3.5% core defense threshold in 2026, including Lithuania, Estonia, Latvia, Poland, and Greece. The countries farthest behind the curve carry the biggest spending obligations ahead of them, not behind.
EU member states’ defense expenditure reached €418 billion in 2025, rising for the eleventh consecutive year, and is expected to reach €454 billion in 2026, an increase of 8.6% year-over-year and 75.3% above 2021 levels. That arithmetic does not reverse because one war pauses.
The Research
The order books tell the same story. BAE Systems and Rheinmetall are sitting on order books worth around £84 billion and €80 billion respectively, and the budgets behind those orders are still rising, with NATO governments committed to the 5% target by 2035. Backlogs of that size represent years of contracted revenue that a ceasefire announcement cannot legally cancel.
Rheinmetall’s fundamentals illustrate the point precisely. The company is profitable and has continued to post strong growth. Yet the stock has already absorbed substantial punishment: it pulled back roughly 50% from its autumn 2025 peak as ceasefire speculation intensified, compressing a valuation that was already correcting from elevated levels.
The Hidden Insight
Here is what the reflex sellers are missing. The composition of defense spending changes after a ceasefire, but the volume does not shrink. The more likely medium-term outcome is a shift in mix rather than a collapse in budgets: less emergency spending on immediate conflict, more steady investment in stockpiles, cyber, logistics, and infrastructure that helps NATO move forces across Europe. That shift is actually favorable for the higher-margin, longer-cycle programs that dominate BAE Systems’ backlog and Rheinmetall’s expansion plan.
Ammunition replenishment alone is a multi-year obligation. Ammunition stocks need rebuilding, equipment sent to Ukraine needs replacing, and air and missile defenses need modernizing, with contracts for shells, vehicles, and radar often running for years. A peace deal accelerates none of those cancellations. It may accelerate the rebuild cycle.
Investment Opportunities
The asymmetry here favors European names over US contractors. American defense budgets are driven by Indo-Pacific posture and domestic politics, not Ukraine specifically. European contractors bear the valuation hit every time a ceasefire rumor circulates, but they hold the contracts tied to a structural budget expansion that runs to 2035. European NATO members have committed to the 5% target by 2035, creating a structural long-term growth environment in military budgets that is policy-backed rather than discretionary.
Rheinmetall, BAE Systems, and Leonardo trade below consensus analyst targets despite record backlogs. That gap closes not with renewed fighting, but with time and earnings delivery.
Risks and Counterarguments
The risk is political, not structural. Deep disagreements over territory and security guarantees underscore the obstacles to ending the war, and a failed negotiation would likely send defense stocks back toward recent highs. That is a bull scenario dressed as a risk. The genuine risk is that a prolonged ceasefire triggers fiscal fatigue in Germany or France before the 2035 timeline, slowing budget execution even if headline commitments hold.
Research Conclusion
The market treats each ceasefire headline as an existential threat to defense sector earnings. The order books, policy commitments, and NATO and EU budget data suggest the opposite: a peace deal shifts the spending mix but leaves the spending floor intact. Investors watching for re-entry levels in Rheinmetall and BAE should focus on earnings delivery dates and backlog conversion rates, not the next dispatch from Witkoff’s shuttle diplomacy. Those are the numbers that will determine whether the valuation discount closes.
