European defense manufacturers retreated sharply on Friday, falling to their lowest levels since early September, as markets reacted to Ukrainian President Volodymyr Zelenskiy’s comments signaling readiness to engage in “honest” work on a U.S.-backed peace plan. The market response underscores how sensitive Europe’s defense sector remains to even marginal signs of geopolitical de-escalation, after nearly three years of sustained demand driven by the war in Ukraine and a major restructuring of European defense budgets.

A Market Repricing After Months of Relentless Momentum

Europe’s benchmark aerospace and defense index dropped 2.6%, reversing part of the extraordinary rally that has sent the sector more than 200% higher since Russia’s full-scale invasion of Ukraine in February 2022. For months, European defense stocks have benefitted from accelerating procurement cycles, multi-year government spending commitments, and aggressive modernization programs. Friday’s decline, however, suggests that investors are recalibrating expectations amid the first credible discussion of a diplomatic framework in months.

The downturn also marks the sector’s steepest weekly slide since mid-October, a period previously characterized by concerns over political gridlock in Washington and a temporary slowdown in U.S. funding approvals for Kyiv. With Zelenskiy’s latest comments raising the possibility of a shift in war dynamics, markets briefly priced in the potential for slower order acceleration.

Individual Stocks Reflect Growing Investor Caution

Germany’s defense suppliers were among the hardest hit. Renk fell nearly 6%, marking its sixth consecutive session of losses, while Hensoldt and Rheinmetall each slipped around 4%. In Italy and Sweden, Leonardo and Saab retreated between 2% and 3%, reflecting broad regional pressure rather than company-specific developments.

The synchronized decline highlights the degree to which defense manufacturers have become tethered to geopolitical narratives. Even though most European governments have already formalized multi-year procurement increases—many above NATO’s 2% of GDP guideline—markets remain highly sensitive to any sign of potential reductions in urgency or political consensus.

Analysts Push Back Against Overreaction

Despite the selloff, several analysts argue that the market may be over-interpreting Zelenskiy’s comments. JPMorgan, in a note circulated earlier in the week, wrote that the peace plan—championed by the U.S.—is unlikely to be accepted by Ukraine or its European allies in its current form. The bank described the pullback in defense shares as a “compelling entry point,” pointing to structural tailwinds that remain firmly intact.

The reasoning is straightforward: even a theoretical peace framework would not eliminate Europe’s long-term security concerns. Defense budgets across NATO have been reset higher not only in response to the war in Ukraine, but also due to heightened concern over Russia’s long-term posture, rising geopolitical fragmentation, and increasing pressure for Europe to assume greater military autonomy. JPMorgan suggested that if Washington were somehow able to impose a peace agreement perceived as advantageous to Russia, the result could be a surge in European defense spending rather than a contraction.

A Sector Still Defined by Structural Demand

The selloff underscores the emotional and headline-driven nature of defense investing, where geopolitical nuance often overshadows long-term fundamentals. For now, the broader trajectory of European military spending remains upward, and defense companies continue to report strong backlogs, improving capacity, and expanding international demand. Markets may have reacted to Zelenskiy’s tone shift, but the structural foundation supporting Europe’s defense sector remains largely unchanged.