Reports of a US-driven Russia-Ukraine peace deal caused European defense stocks to drop 10%-20% since October. Valuations are tied to budget increases, not short-term Ukraine revenue. Deal terms include Ukraine ceding territory, reducing armed forces, and losing key weapons. European defense stocks are undervalued post-selloff, with fundamentals intact.

European governments’ long-term demand for defense remains strong, driven by inventory rebuilding and autonomy from US support. Ukraine procurement is minimal for most contractors, with Germany as its largest supporter. Rheinmetall, with only EUR 1.7 billion in Ukraine orders, highlights the sector’s reliance on domestic and NATO-driven demand.

Read more at Morningstar: European Defense: Overreaction to Potential Ukraine Deal Ignores the Real Drivers of Demand