Analysis of Trump-Zelenskiy Talks' Impact on European Defense Sector

On December 28, 2025, US President Trump and Ukrainian President Zelensky held talks at Mar-a-Lago in Florida to discuss a peace plan to end the Russia-Ukraine conflict. According to public information:

• Zelensky
  : 90% agreement has been reached on the 20-point peace plan, and the security guarantee agreement has been fully reached [1]
• Trump
  : The security guarantee agreement is “nearly 95%” complete; European countries will “bear most” of the security guarantee work, with the US providing support [2][3]
• Core Obstacle
  : The territorial issue in the Donbas region remains a “very thorny” unresolved problem; Trump hinted that territorial concessions may be needed [4]

• Russia controls approximately 12% of Ukraine’s territory, including 90% of the Donbas region, 75% of Zaporizhzhia and Kherson regions, and the entire Crimean Peninsula annexed in 2014 [1][5]

After the news of the talks broke, the European defense sector saw significant adjustments:

• Rheinmetall (RHM.DE)
  : Fell 2.04% to €1,509.50 (market capitalization €68.7 billion) [0]
• BAE Systems (BA.L)
  : Fell 0.85% to £1,688.00 [0]
• Thales (HO.PA)
  : Fell 1.27% to €225.80 [0]

Progress in peace talks has triggered a revaluation of geopolitical risk premium by the market:

• Expectation of Conflict Mitigation
  : If a peace agreement is reached, it will significantly reduce the direct military threat in Eastern Europe
• Concerns about Arms Sales Demand
  : Investors worry that peace may lead to a slowdown in emergency arms procurement
• Budget Pressure Relief
  : European countries may re-evaluate the priority of defense spending

• After the outbreak of the Ukraine war (February 2022), the Bloomberg European Defense Index continued to outperform the broader market, with a cumulative increase exceeding 150% [6]
• This peace talk has led to short-term profit-taking in the sector

Despite short-term pressure, there are multiple supports for long-term risk premium:

• The 2022 Madrid Summit established a 2% GDP defense spending target
• The 2024 Washington Summit reaffirmed the commitment, and most European countries promised to maintain or increase spending levels
• Germany established a €10 billion special defense fund, and France promoted the Military Planning Law (2024-2030)

• Russia’s long-term strategic threat remains (even if a peace agreement is reached)
• Non-traditional threats such as hybrid warfare, cyber attacks, and energy security are on the rise
• The demand for European strategic autonomy is increasing

• Companies like Rheinmetall and BAE continue to expand capacity (ammunition, tanks, artillery)
• Long-term contracts and high supply chain restructuring costs create strong exit barriers

• P/E Ratio (TTM): 80.29x
• EPS (TTM): €18.80
• 52-week Range: €593.20 - €2,008.00
• Current stock price is at the upper-middle level of the 52-week range (approximately 75th percentile)

• Historical Comparison
  : Current valuation is far higher than the historical average, reflecting war premium
• Growth Support
  : Backlog of orders reaches a historical high, with strong performance visibility for the next 2-3 years
• Risk Discount
  : Peace uncertainty leads to valuation correction pressure

1. Order Backlog
   : Companies like Rheinmetall have record backlogs (mainly government contracts)
2. Long-term Demand
   : Demand for equipment modernization in NATO countries (replacing Soviet-era equipment)
3. Capacity Investment
   : Companies have significantly expanded capacity over the past two years, forming fixed cost investments
4. Geopolitical Diversification
   : Although the Ukraine conflict may ease, demand in other global hotspots (Indo-Pacific, Middle East) is rising

1. Peace Agreement Uncertainty
   : Territorial issues remain a key obstacle, and negotiations may break down
2. Budget Priority Adjustment
   : Europe faces economic slowdown pressure, and defense spending may be cut
3. Political Cycle
   : Multiple elections in 2025 may affect the continuity of defense policies

Comparison with US Defense Stocks:

• US defense giants
  (Lockheed Martin, RTX) are less affected, as their demand comes more from the Indo-Pacific and Middle East
• European defense stocks
  are more sensitive to the Ukraine conflict due to higher direct geopolitical relevance

• Increased volatility, following the progress of peace talks
• Key Observations: Donbas issue resolution, details of security guarantees
• Recommendation: Wait for clearer signals of a peace agreement before entering

• Even if a peace agreement is reached, defense spending is difficult to cut quickly (long-term contracts, capacity investments)
• Strategic autonomy and NATO commitments provide demand resilience
• Recommendation: Deploy high-quality leaders on dips, focus on order execution

• Long-term security investment in a multipolar world
• The Russia-Ukraine conflict has reshaped European defense thinking; normalization of spending is a high-probability event
• Recommendation: Hold core assets, focus on technological upgrades (drones, electronic warfare, cyber defense)

• Complete territorial concessions (including recognition of Crimea’s ownership)
• Vague European security guarantees
• Expanded internal divisions in NATO (US withdrawal, Europe taking more but insufficient investment)

• Compromise on territorial issues but retain sovereignty claims
• Clear multilateral security guarantee mechanism
• European defense spending maintains the 2% GDP target

1. Unexpected Peace Agreement
   : If the agreement includes major territorial concessions and sufficient security guarantees, the market may further lower the valuation of defense stocks
2. European Economic Recession
   : Increased economic pressure may force countries to cut defense budgets
3. Geopolitical Reversals
   : Russia violating the agreement or other conflicts breaking out (e.g., Indo-Pacific) may change investment logic
4. Overvaluation
   : Current valuation already reflects a lot of positives, insufficient safety margin

• Diversified Investment: Allocate to US defense stocks at the same time (more diversified demand sources)
• Option Strategy: Buy put options to protect against downside risk
• Timing: Wait for clearer peace agreement before making major allocation decisions

• Geopolitical risk premium declines, sector valuation is under pressure
• Market worries that peace leads to a slowdown in emergency arms procurement
• Technical profit-taking occurs (all three leaders fell 0.85%-2.04%)

• NATO’s 2% target commitment is difficult to reverse
• Long-term demand for European strategic autonomy
• Defense industry capacity investment forms exit barriers
• Normalization of security investment in a multipolar world

• Recommendation: Wait and see or reduce positions
• Wait for key details of the peace agreement to become clear (especially the Donbas issue resolution)
• Risk/reward ratio is not attractive currently

• Can deploy high-quality leaders on dips (Rheinmetall, BAE)
• Adopt a phased buying strategy to avoid one-time heavy positions
• Focus on order execution rate and capacity utilization indicators
• Set stop-loss levels (e.g., Rheinmetall falls below €1,400)

• Pure Long: Recommend no more than 5-8% of the portfolio
• Hedging Strategy: Equip with put option protection, or hold US defense stocks to diversify geopolitical risk

[0] Gilin API Data - Stock Prices, Market Data, Valuation Indicators

[1] USA Today - “‘Makings of a deal.’ Trump meets Zelenskyy, speaks with Putin on Ukraine” (https://www.usatoday.com/story/news/politics/2025/12/28/donald-trump-vladimir-putin-volodymyr-zelenskyy-ukraine-russia/87935520007/)

[2] BBC - “Ukraine-Russia latest: Trump says progress made after Ukraine peace plan talks but ‘thorny issues’ remain” (https://www.bbc.com/news/live/c7732j0jvnnt?page=2)

[3] Fox News - “Trump, Zelenskyy say Ukraine peace deal close but ‘thorny issues’ remain after Florida talks” (https://www.foxnews.com/politics/trump-zelenskyy-say-ukraine-peace-deal-close-thorny-issues-remain-after-florida-talks)

[4] New York Post - “Trump willing to travel to Ukraine, pitch parliament on ceding land to Russia in bid to end war” (https://nypost.com/2025/12/28/us-news/trump-willing-to-travel-to-ukraine-pitch-parliament-on-ceding-land-to-russia-in-bid-to-end-war/)

[5] The Times of Israel - “US and Ukraine ‘a lot closer’ on peace deal, Trump says after meeting with Zelensky” (https://www.timesofisrael.com/us-and-ukraine-a-lot-closer-on-peace-deal-trump-says-after-meeting-with-zelensky/)

[6] Yahoo Finance - “Rheinmetall AG (RHM.DE) Stock Price, News, Quotes and Records” (https://hk.finance.yahoo.com/quote/RHM.DE/)

[7] NBC News - “Trump meets with Zelenskyy at Mar-a-Lago as peace talks advance” (https://www.nbcnews.com/video/trump-meets-with-zelenskyy-at-mar-a-lago-as-peace-talks-advance-255086149769)

[8] ABC News - “Volodymyr Zelenskyy arrives at Mar-a-Lago for peace talks with President Trump” (https://abcnews.go.com/Politics/volodymyr-zelenskyy-arrives-mar-lago-peace-talks-president/story?id=128736611)