European defense stocks took a nosedive this week, tumbling like dominoes after news broke about U.S.-led peace talks regarding Ukraine. Major indices tracking defense companies fell between 8% and 12% in just one week, leaving investors scrambling to figure out what comes next.
Defense stocks crashed hard as Ukraine peace talk rumors sent investors racing for the exits across European markets.
The selloff hit some big names particularly hard. Rheinmetall from Germany dropped over 15% in early trading, while Italy’s Leonardo saw its shares fall 13% within two days. Sweden’s Saab wasn’t spared either, declining 11% as the sector weakness spread. Even Rolls-Royce in the UK lost 10% of its value, with its defense divisions feeling the most pressure.
The STOXX Europe Targeted Defence index painted a grim picture, falling 10.5% during the week following the peace talk announcements. Companies that focus purely on military equipment got hit the hardest, dropping an average of 12%. Meanwhile, firms with more diverse business portfolios managed slightly better, seeing smaller declines of 6% to 8%. This decline reversed the previous trend where companies with high military revenues had significantly outperformed their peers throughout 2025.
Investors clearly started rethinking their defense bets. European defense ETFs saw massive outflows of over €1.2 billion in just one week. That’s like watching a giant wave of money rush toward the exit all at once.
Analysts pointed to reduced expectations for long-term defense spending as the main reason behind the dramatic selloff. Many institutional investors began moving their money from defense companies into other sectors that seemed less likely to be affected by changing geopolitical situations.
This correction stands out as the largest sector-wide drop since early 2022, when Russia first invaded Ukraine. What makes this selloff unique is its direct connection to diplomatic developments rather than broader market troubles. Remarkably, this decline erases nearly half of the sector’s gains from a year when defense stocks had risen approximately 50% before the peace talks emerged.
The steep declines did create some interesting opportunities though. Price-to-book ratios for leading European defense firms fell 15% to 20%, while forward price-earnings ratios dropped from above 25 times to around 20 times. Dividend yields also increased as share prices tumbled, potentially making some stocks more appealing to investors seeking steady income. Some companies may face pressure to reduce or eliminate dividend payments during this period of uncertainty, which could further impact investor sentiment.
