Are defense stocks about to take a hit?

Over the past few years, stocks from European companies such as Dassault Aviation, Thales, and Rheinmetall and U.S. giants such as RTX and Northrop Grumman have far outperformed the S&P 500 index. The main driver has been the steady rise in geopolitical tensions around the world.

But now it seems that progress is being made on one of the main factors driving the boom in military orders. This Friday, Donald Trump is scheduled to meet with Vladimir Putin in Alaska to discuss ending the conflict in Ukraine. Against this backdrop, Rheinmetall shares took a heavy hit, losing around 13% in just five days.

Will they be able to reach an agreement?

According to reports, the U.S. president's plan is to persuade both sides to agree to a territorial exchange. However, Ukraine has already stated it will not cede territory in exchange for peace with Russia. EU leaders also do not seem very enthusiastic about the proposal, but are pushing for new sanctions on Moscow.

While preliminary agreements may be reached with Russia, any deal would still need Ukraine's approval, and so far, Kiev has shown no willingness to compromise. And should peace be achieved, the EU would still need to replenish the reserves it sent to Ukraine, keeping defense companies busy for years to come.

For instance, Fitch Ratings estimated that orders for the eight largest European defense companies increased by 15% in 2024, and their combined order bookings surged by 19% to a record €291 billion. The proposed “ReArm Europe” plan will give the sector an additional boost.

In addition, other flashpoints remain.

In the Middle East, for instance, peace remains a distant prospect. Israel's operation in Gaza continues and could even be expanded. Tensions with Iran could also escalate, as no new nuclear agreement has been reached. Some geopolitical experts predict that there could be another operation against Tehran in the fall.

It is no surprise, then, that European countries have tripled the pace of expansion of their defense production facilities. In just two years, major European defense contractors have built more than 7 million square meters of new manufacturing space, clearly with future demand in mind.

So, is it time to sell defense stocks? 

Much of the good news for defense companies already seems priced in. But if Friday's talks between Trump and Putin fail, defense stocks could rebound again. If, on the other hand, real progress toward peace is made beyond mere words, defense stocks (and gold) could correct, but the market as a whole could benefit.