European defence stocks send false peace signal

RENK AG

19/08/2025 11:41

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Liam  Proud

LONDON, Aug 19 (Reuters Breakingviews) - Suppliers of tanks, jets and artillery shells tend to benefit from wars – and do less well when the fighting stops. In theory, that makes shares in European defence groups like Rheinmetall RHMG.DE, Renk R3NK.DE, Leonardo LDOF.MI and others a rough proxy for how well the Ukraine peace talks are going. Yet there are hazards of taking this approach too far – as a major stock move on Tuesday shows.

Eight big European military suppliers, collectively worth $307 billion when markets closed on Monday, lost over $15 billion or 5% of their equity value by midmorning London time the following day. Worst hit were Germany’s $7 billion Renk, which makes tank gearboxes, and Italy’s $30 billion Leonardo, known for helicopters and surveillance systems. Both were down about 8% at one point.

At first glance that might seem like a vindication of U.S. President Donald Trump’s self-professed efforts to end the conflict in Eastern Europe. In recent days he has met with Russian President Vladimir Putin and his Ukrainian counterpart Volodymyr Zelenskiy, as well as a host of other interested leaders including German Chancellor Friedrich Merz, French President Emmanuel Macron and British Prime Minister Keir Starmer. A stock slide for the defence groups implies lower demand for everything from Rheinmetall tanks to BAE Systems’ BAES.L jets, suggesting a chance of less future fighting after the conflabs.

Yet that account is hard to reconcile with what happened at the meetings, which produced no clear commitments on security guarantees for Ukraine, or any evidence that Putin is ready to even contemplate a ceasefire. At best, the only real justification for higher peace hopes might be that things didn’t spiral out of control as they did in late February, when a heated exchange between Trump, Zelenskiy and U.S. Vice President JD Vance sent European defence stocks soaring.

The market moves probably reflect high expectations as much as diplomatic reality. Renk, Leonardo, Hensoldt HAGG.DE, Babcock International BAB.L, Saab SAABb.ST, Rheinmetall, Thales TCFP.PA and BAE Systems on average traded at over 30 times 12-month forward earnings at the end of last week. That’s almost double their five-year average, putting the European military suppliers roughly on a par with Microsoft MSFT.O and Nvidia NVDA.O in terms of stock-market ratings.

Citigroup analysts calculated in early August that Hensoldt, Renk and Saab required a 4 to 5.5 times increase in operating profit between 2025 and 2034 to justify their share prices, which was roughly twice as fast as the same brokers estimated that government defence procurement budgets would grow over the same period. Even after Tuesday’s slight wobble, then, the sector’s valuations still imply soaring European defence spending. In other words, the stock drop says more about these companies’ toppy valuations than it does about a meaningful chance of peace.

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CONTEXT NEWS

European defence stocks fell on August 19, following a White House summit the day before at which U.S. President Donald Trump and European leaders discussed the Ukraine war.

Trump told President Volodymyr Zelenskiy that the United States would help guarantee Ukraine’s security in any deal to end Russia's war there, though the extent of any assistance was not immediately clear.

"When it comes to security, there's going to be a lot of help," Trump told reporters, adding that European countries would be involved. "They are a first line of defence because they're there, but we'll help them out."

Zelenskiy hailed the promise as "a major step forward," adding that the guarantees would be "formalized on paper within the next week to 10 days" and saying Ukraine offered to buy about $90 billion worth of U.S. weapons.

Defence groups Renk, Leonardo, Hensoldt, Babcock, Saab and Rheinmetall were down around 8% to 4% on August 19, as of 1007 GMT.

European defence stocks’ soaring price-earnings multiples https://www.reuters.com/graphics/BRV-BRV/dwpkllzqnvm/chart.png

European defence stocks’ soaring price-earnings multiples https://www.reuters.com/graphics/BRV-BRV/dwpkllzqnvm/chart.png

(Editing by George Hay; Production by Streisand Neto)

((For previous columns by the author, Reuters customers can click on PROUD/liam.proud@thomsonreuters.com))