Ukraine Peace Hopes Trigger Significant Sector Rotation in European Equities

This analysis is based on the Reuters report [1] published on January 22, 2026, which documented a pronounced sector rotation in European equity markets following Ukrainian President Volodymyr Zelenskiy’s announcement that Ukrainian and Russian delegations will hold their first trilateral meeting with U.S. officials. Stocks with significant exposure to Ukraine and Eastern European markets rallied substantially, with Ferrexpo leading gains at +19%, while European defence stocks experienced their steepest decline since early December, with the sector index falling 2.3% [1]. JPMorgan has recommended buying the dip in defence stocks, maintaining an Overweight rating with a €2,250 price target for Rheinmetall [2][3], suggesting institutional confidence in the long-term structural growth of European defence spending despite near-term peace optimism.

The January 22, 2026 market reaction represents a textbook example of sentiment-driven sector rotation triggered by evolving geopolitical developments. President Zelenskiy’s announcement following his meeting with President Donald Trump at the World Economic Forum in Davos catalyzed immediate repricing across European equity markets, with investors rapidly reassessing the risk-reward profiles of companies with varying exposure to the Ukraine conflict [1].

The market’s response demonstrates a clear bifurcation between sectors expected to benefit from economic normalization and those perceived as vulnerable to reduced geopolitical tensions. This rotation pattern reflects the market’s forward-looking nature, where asset prices rapidly incorporate expectations of future developments before concrete outcomes materialize. The magnitude of the moves—particularly the 19% surge in Ferrexpo and 9% gain in Wizz Air—indicates that traders and investors placed significant probability weight on the potential for meaningful progress in peace negotiations [1].

The rally in Ukraine-exposed stocks spanned multiple sectors, reflecting the broad economic connections between the conflict zone and European markets:

— The most dramatic gain came from Ferrexpo, a London-listed iron ore producer with significant operations in Ukraine. The magnitude of this move reflects market expectations for the resumption of Ukrainian iron ore exports through Black Sea trade routes that have been disrupted or endangered since the conflict began [1]. Iron ore is a critical input for European steel production, and the potential normalization of supply chains from Ukraine—once among the world’s leading exporters—represents a meaningful supply-side consideration for European industrial metals markets.

— Wizz Air’s substantial gain indicates investor optimism about the resumption of normal air travel patterns to and from Eastern Europe. The low-cost carrier has substantial route networks connecting Western Europe to destinations in Poland, Romania, and other Eastern European countries that have served as transit points for refugees and military logistics during the conflict [1]. A normalization of the geopolitical situation would remove flight route restrictions, reduce insurance premiums, and potentially unleash pent-up travel demand.

— Raiffeisen Bank International’s rally reflects expectations for improved credit conditions and reduced risk premiums in Eastern European operations [1]. The bank maintains significant exposure to Russia and Ukraine through its historical presence in these markets, and peace progress would substantially de-risk its loan portfolio and enable more normalized operations.

— The European materials and construction index’s performance, with notable gains in companies like Buzzi, Heidelberg Materials, and Rockwool, reflects market expectations for post-war reconstruction in Ukraine [1]. The scale of infrastructure damage sustained during the conflict suggests a multi-year construction boom if peace is achieved, potentially involving significant participation from European construction and materials companies.

The defence sector’s decline represents a mirror image of the Ukraine-exposed stocks’ rally, with investors rapidly repricing companies perceived as beneficiaries of extended conflict:

— The sector index’s decline marked its most significant single-day drop since early December, reflecting the magnitude of the sentiment shift [1]. Defence stocks had been among Europe’s strongest performers since 2022, supported by governments’ commitments to increase military spending and reduce reliance on U.S. security guarantees.

— Saab declined 4.3% and Rheinmetall fell 3.7%, with the latter partially recovering from earlier intraday lows [1]. These declines occurred against a backdrop of additional negative factors, including President Trump’s decision to back off tariff threats toward Europe and rule out military action to acquire Greenland—comments that some investors interpreted as potentially reducing immediate geopolitical tensions.

— Despite the short-term decline, JPMorgan Chase & Co. has maintained its constructive stance on European defence stocks, recommending that investors view the pullback as a buying opportunity [2][3]. The bank maintains an Overweight rating on the sector with a €2,250 price target for Rheinmetall, suggesting confidence that long-term structural growth drivers remain intact regardless of near-term peace developments [3].

U.S. market performance during the same period provided additional context for the European sector rotation [0]. The S&P 500 closed marginally lower at 6,930.03 (-0.21% weekly), while the NASDAQ declined 1.05% to 23,480.90 [0]. The Dow Jones showed modest strength (+0.22%), but the most notable U.S. performance came from the Russell 2000, which surged 3.63% weekly [0]. This small-cap strength could indicate domestic-focused U.S. investors responding similarly to reduced geopolitical risk premiums, preferring domestically-oriented companies over those with international exposure.

The market reaction on January 22 illustrates the ephemeral nature of sentiment-driven trading based on diplomatic developments. Historical experience with Ukraine peace negotiations suggests that market optimism can reverse rapidly if talks stall or break down. The current rally represents a binary outcome pricing—investors assigning meaningful probability to a successful peace outcome—rather than a fundamental reassessment of company valuations. This distinction matters because it suggests the rally’s sustainability depends entirely on diplomatic follow-through rather than existing business fundamentals.

The divergence between short-term market pressure on defence stocks and institutional recommendations to buy the dip highlights an important analytical distinction [2][3]. Defence spending represents a structural policy commitment by European governments that predates the Ukraine conflict and will likely persist regardless of its resolution. The post-2022 defence spending increases reflected not merely reaction to immediate threats but recognition of longer-term strategic requirements, including reduced U.S. commitment to European security and growing concerns about Russian assertiveness. This structural backdrop suggests that even with peace, European defence budgets may remain significantly elevated compared to pre-2022 levels, providing a floor for defence company revenues.

The materials and construction sector rally reflects market anticipation of a potential “reconstruction arbitrage”—the expectation that European companies, particularly those with geographic and cultural proximity to Ukraine, will capture significant reconstruction contracts [1]. This anticipation hasbid up share prices for companies like Heidelberg Materials (cement), Buzzi (construction materials), and Rockwool (insulation products) that would logically participate in large-scale infrastructure rebuilding. However, investors should note that reconstruction benefits are likely years away even under optimistic scenarios, and the competition for contracts will be intense.

Wizz Air’s 9% gain represents the market’s expectation for normalization of Eastern European air travel, but this recovery remains conditional on multiple factors beyond peace talks [1]. These include the removal of airspace restrictions, normalization of insurance costs for flights to the region, passenger demand recovery in affected economies, and competitive dynamics within the European aviation sector. The low-cost carrier model depends on high aircraft utilization and dense route networks, both of which require stable operating environments.

— The most significant short-term risk is the inherent uncertainty of diplomatic negotiations. Historical precedent from multiple conflict zones suggests that peace talks can break down without warning, and trilateral negotiations involving Ukraine, Russia, and the United States face substantial structural obstacles [1]. Investors in rallied stocks should be aware that share price gains could reverse rapidly if negotiations stall.

— Even successful negotiations may not produce the economic normalization the market is pricing in. A ceasefire that leaves Russian forces in Ukrainian territory, or that does not result in lifted sanctions, would limit the economic benefits for companies like Raiffeisen with Russian exposure.

— The materials sector rally assumes participation in post-war reconstruction, but competition for these contracts will be intense, and political considerations may influence award decisions. Additionally, reconstruction funding remains uncertain, with questions about the role of frozen Russian assets and international financial institutions.

— The defence sector’s decline may represent overcorrection, with markets potentially underestimating structural spending commitments. However, if peace talks succeed in producing a durable ceasefire, defence budget pressure could intensify as governments face competing spending priorities.

— JPMorgan’s recommendation to buy defence stocks on weakness suggests that institutional investors view the current pullback as a tactical opportunity [2][3]. For investors with longer time horizons and higher risk tolerance, the current discount may represent an attractive entry point to a structurally growing sector.

— For investors confident in peace progress, the construction and materials sector offers indirect exposure to reconstruction themes. Companies like Heidelberg Materials and Buzzi have diversified exposure beyond Eastern Europe, providing some protection against potential disappointment in peace talks.

— Ferrexpo’s rally reflects expectations for normalized Ukrainian iron ore exports [1]. If peace materializes, this could create supply-demand dynamics affecting global iron ore markets, with implications beyond the directly exposed companies.

The January 22, 2026 market reaction to Ukraine peace developments reveals several key informational themes:

The diplomatic breakthrough announced by President Zelenskiy—trilateral meetings between Ukrainian, Russian, and U.S. officials—represents the most concrete peace progress since the conflict began, though the outcome remains uncertain [1]. European equity markets responded with pronounced sector rotation, rewarding peace-sensitive sectors and penalising war-related beneficiaries.

The rally’s magnitude—particularly Ferrexpo’s 19% surge and Wizz Air’s 9% gain—suggests meaningful investor conviction about peace probability, though this conviction may prove fragile if negotiations encounter obstacles [1]. The European materials and construction sector’s 2.9% advance reflects market anticipation of post-war reconstruction, though actual benefits remain years away.

Defence stocks’ 2.3% sector decline reflects near-term sentiment pressure, but institutional investors like JPMorgan maintain constructive long-term views, recommending buying dips with price targets like €2,250 for Rheinmetall [2][3]. This divergence between short-term market action and institutional recommendations highlights the importance of investment time horizon in sector allocation decisions.

The U.S. market context shows mixed performance, with the Russell 2000’s 3.63% weekly gain potentially indicating similar risk-on sentiment among domestic-focused U.S. investors [0]. Market participants should monitor diplomatic developments closely, as the sustainability of the observed sector rotation depends entirely on concrete progress in negotiations.