Remember those heady days after the Berlin Wall fell? Defence budgets got slashed across the West, armies shrank, and investors who had been riding the military-industrial complex suddenly found themselves staring at empty order books. History, it seems, loves to rhyme. As whispers grow louder that Donald Trump is pushing hard for a quick ceasefire in Ukraine, European defence stocks have started to wobble. The fear is obvious: peace breaks out, the urgency evaporates, and governments go right back to spending on hospitals and pensions instead of tanks and missiles.
It’s a perfectly rational worry. Look at what happened to some of the continent’s biggest names in recent days. Rheinmetall, the German tank and artillery giant that had rocketed more than 170% in the past year, suddenly shed a chunk of those gains. Thales in France and Leonardo in Italy felt the pain too. Even ESG funds that had reluctantly started dipping toes into “defence” as a necessary evil are nervously eyeing the exit.
But here’s the thing – I’m not convinced the peace dividend is coming this time. In fact, the structural drivers pushing military spending higher might actually accelerate if the guns fall silent in Ukraine.
Why a Ukraine Ceasefire Changes Everything – and Nothing
Let’s start with the obvious. Three years of brutal warfare on Europe’s doorstep shattered the comfortable illusion that the continent could keep defence spending at Cold War lows forever. The “Zeitenwende” speech by Olaf Scholz, Germany’s €100bn special fund, the scramble to hit 2% of GDP – all of that was driven by daily images of Russian advances and Ukrainian cities reduced to rubble.
Take that daily emergency away and, yes, political pressure to keep the foot on the spending pedal will ease. Voters have short memories. Finance ministers desperate to close gaping budget holes will start whispering that maybe 1.6% is “close enough” to the NATO target after all.
Yet two counter-forces look far more powerful.
1. Security Guarantees Will Still Cost a Fortune
Any realistic deal will require iron-clad assurances that Russia won’t simply rearm and try again in 2028 or 2030. Ukraine won’t accept – and Europe shouldn’t tolerate – a frozen conflict with no protections.
What might those protections look like?
- Multinational peacekeeping contingents stationed along the new line of contact – think thousands of European troops needing everything from armoured vehicles to advanced air-defence systems.
- Bilateral defence pacts where countries like the UK, France, Poland, and the Baltic states commit to rapid reinforcement – again, that means pre-positioned equipment and constant training.
- A Marshall Plan-style rebuilding of the Ukrainian military itself, probably financed in part by seized Russian assets and EU borrowing.
All of that translates into contracts. Lots of them. And the companies best placed to fulfill those contracts are the same European champions that have been riding the wave for the past three years.
2. American Withdrawal Accelerates
This, in my view, is the real game-changer. The war in Ukraine has been the one thing keeping Washington deeply engaged in European security. Remove the active shooting war and the pivot to Asia – already underway under Obama, paused under Biden, openly embraced by Trump – resumes at warp speed.
Trump has been crystal clear: he wants European allies at 3% of GDP minimum on defence, not the 2% that already feels like pulling teeth for half the alliance. He doesn’t want American taxpayers carrying the load while Europe enjoys butter and a tiny bit of guns.
Europe has to step up. Big league. They’ve been ripping us off for years.
– Typical Trump formulation (paraphrased)
Whether he gets 3% or not, the direction of travel is unmistakable. Fewer U.S. troops in Europe. Fewer U.S. ships patrolling the Baltic. Less American intelligence sharing taken for granted. The continent will have to plug those gaps itself.
And Russia isn’t going anywhere. Even if Putin signs a piece of paper, the conventional force disparity remains daunting. Moscow will continue modernising its arsenal, running snap exercises on NATO’s borders, and reminding everyone that geography hasn’t changed.
What History Actually Tells Us
People keep invoking the post-Cold War peace dividend, but the parallel isn’t perfect. Back then the threat really did evaporate overnight. The Red Army dissolved, the Warsaw Pact disappeared, and Russia spent a decade as a chaotic basket case rather than a peer competitor.
None of that applies today. Russia’s economy has been surprisingly resilient under sanctions. Its military, bloodied but far from broken, is already incorporating lessons from the Ukraine fight at lightning speed. Hybrid threats – cyberattacks, energy coercion, election meddling – haven’t paused for a single day.
In short, Europe faces a hostile power with the intent and growing capability to do harm, and an increasingly reluctant American guarantor. That’s a very different equation from 1991.
Where the Money Will Flow
So if spending stays high – or rises – which areas look most promising for investors?
- Air and missile defence – think Germany’s IRIS-T, France’s Aster, the European Sky Shield initiative.
- Artillery and ammunition – the famous 155mm shell shortage isn’t fixed yet; production lines will run hot for years.
- Armoured vehicles – old Leopard 1s are being pulled out of storage; new platforms like MGCS (France-Germany) and GCAP (UK-Italy-Japan) fighter programmes keep rolling.
- Drones and counter-drone – Ukraine proved how cheap UAVs can neutralise billion-dollar assets.
- Cyber and electronic warfare – often overlooked but budget lines are exploding.
Perhaps the biggest wildcard is the mooted €150 billion EU common defence fund. If that actually materialises – and political momentum is building fast – it would be the first time Brussels directly finances weapons procurement. The beneficiaries would overwhelmingly be European primes.
Valuation Reality Check
Of course, nothing goes up in a straight line. Recent pullbacks have brought some multiples back to earth. Rheinmetall still trades at around 20 times forward earnings – hardly dirt cheap, but not the nosebleed levels of six months ago. Thales and BAE Systems sit closer to 17-18 times, reasonable for companies with order backlogs stretching to 2030 and beyond.
In my experience, the market hates uncertainty more than bad news. Once investors price in a ceasefire scenario and realise the spending trajectory doesn’t reverse, we could see a powerful relief rally.
The Bottom Line for Investors
Peace in Ukraine would be a humanitarian triumph. It would save countless lives and free up resources for desperately needed reconstruction. But from a pure investment perspective, it probably doesn’t herald the return of the 1990s-style peace dividend.
Europe has woken up to the fact that it lives in a rough neighbourhood, and the world’s strongest ally is increasingly looking elsewhere. Those two realities aren’t going away just because the shooting stops.
Defence stocks may experience short, sharp sell-offs on ceasefire headlines. But the medium to long-term outlook? Still firmly pointed north.
Sometimes the market gets scared of the wrong thing.
