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Some of Europe’s biggest military contractors on Tuesday called on investors not to drain cash from the sector as stocks sold on hopes of a peace deal between Russia and Ukraine.

President Donald Trump’s special envoy Steve Witkoff and his son-in-law Jared Kushner participated in peace talks with Ukrainian President Volodymyr Zelenskiy in Berlin over the weekend. During the meeting, Zelensky said Kiev was willing to abandon its ambitions to join NATO in order to secure an agreement to end the war.

U.S. officials later told reporters that a peace deal was nearing completion, while President Donald Trump said negotiators were “closer than ever” to preventing conflict. Negotiations are expected to continue through the weekend.

Investors took the news seriously, with European defense stocks selling off on Tuesday and some major companies extending losses from the previous day. By 11:40 a.m. London (6:40 a.m. ET), the region’s Stoxx Aerospace and Defense Index was down 2.2%, with Swedish fighter jet maker Saab leading the losses with a 5.2% drop. italian leonardodown 4.7%, Germany’s line metalwhich last fell 4.5%, was also one of the biggest decliners.

A spokesman for German Defense Chancellor Hensoldt said the company hoped for “a just and lasting peace in Ukraine,” but added that even if that were achieved, Europe would still be under threat of attack.

“The cessation of hostilities will give Russia the opportunity to rebuild its military capabilities. From a European security perspective, the potential threat still exists and may even intensify.”

“Against this background, defense preparedness remains a structural necessity for Europe,” they added.

A Hensoldt representative said the company’s business exposure to Ukraine is limited and accounts for only a single-digit percentage of sales. The company’s stock price has more than doubled since the beginning of the year, but it last traded 4.6% lower.

“Our growth trajectory is primarily driven by large-scale long-term programs in Germany and across Europe,” a spokesperson told CNBC on Tuesday morning, citing triple-digit contracts to equip German military reconnaissance vehicles with software and advanced sensors, as well as projects under the European Skyshield initiative.

Many of the company’s contracts will continue “beyond 2026,” they added.

A representative from Lenk, a German vehicle systems manufacturer that contracts with more than 70 militaries around the world, acknowledged that European defense stocks become “more volatile” “every time there is news about a peace deal or a possible ceasefire in Ukraine.”

“While peace in Ukraine is greatly welcomed by the Ukrainian people, we continue to see the threat scenario in Europe and the world as being at its highest level since the end of the Cold War,” he added.

Renk’s stock price has risen about 194% since the beginning of the year, but was most recently trading down 4.8%.

A company spokesperson added on Tuesday morning, “The downward movement in the stock price is being driven more by market sentiment than by any obvious impact on the outlook for Lenk or other defense companies.”

“European NATO members are committed to 3.5%. [spending] “The goal is through 2035 and leads to a structural long-term growth environment for military budgets,” they said.

Europe’s defense sector has seen significant growth this year, driven by the Ukraine war and pledges by regional governments and the NATO military alliance to increase defense spending.

The pledge is widely expected to boost profits for European companies, with companies headquartered in the region already reporting record order backlogs and big increases in revenue.

Since the start of the year, the Stoxx European Aerospace and Defense Index has risen more than 50%, with the value of some regional defense companies more than doubling.

Hensoldt and Lenk’s view that Russia continues to pose a threat to the continent is shared by regional officials.

NATO chief Mark Rutte said in a speech last week: “We are Russia’s next target and we are already in harm’s way,” while British Secret Intelligence Service chief Blaise Metreweri warned in a speech on Monday that the region faces “an aggressive, expansionist and revisionist Russian threat.”

TS Lombard managing director Christopher Glanville told CNBC’s “European Early Edition” on Tuesday that money markets may be mispricing what appears to be a “late stage” of the war underway.

“The market is pricing it in as a peace dividend,” he added. “You can see that in the way European defense stocks are coming back, which have been impressively outperforming over the past couple of years. In our view, there is no peace dividend, so that looks like a buying opportunity.”

Granville argued that this was due to changing relations between Russia and Europe.

“The outcome of the war will be for Russia’s military to ensure irreversible territorial changes in Europe, which will provide a great incentive to improve Europe’s defense industrial capabilities and continue arms procurement,” he added.

He added that the “non-peace dividend” would be reflected in lower risk premiums, as “spending on defense industrial capacity would still be available” even after the war ended.

Michael Field, chief equity strategist at Morningstar, said the market’s reaction to a potential peace deal was “overdone.”

“The war in Ukraine has been an important driver for the European defense sector, but what the market is currently missing is that the war in Ukraine has created a set of structural drivers for the sector that will remain in place even if a peace agreement is reached,” he told CNBC.

“The increase in NATO’s spending targets has been agreed by the participating member states and will not be withdrawn. Similarly, the topic of replenishment remains untouched. It will take at least a decade for a country like Germany to replenish the weapons supplied to Ukraine. Both of these conditions will greatly support the European defense sector in the medium term and support stock valuations in the long term,” he added.

“The risk of invasion seems unlikely to be completely eliminated,” Claire Titmarsh, a defense equity analyst at British asset management firm Rathbones, told CNBC.

“Furthermore, the expected increase in European defense spending is not solely due to the Ukraine war. Deep-rooted structural factors remain, including a long-term underinvestment, continued strategic challenges from Russia that persist even after the Ukraine settlement, and the urgency for European strategic autonomy amid signals that the United States will reduce its role in undertaking European defense,” he said in an email on Tuesday.

She also questioned how stable the peace deal would actually be.

“It remains very uncertain whether Russia will abide by the peace agreement,” Titmarsh added. “History suggests caution, and President Putin’s actions are notoriously unpredictable.”

—CNBC’s Justin Papp and Holly Ellyatt contributed to this article.