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The share price of defence contractor BAE Systems (LSE: BA.) has soared over the last few years. Currently, the shares are trading for 1,788p – roughly 130% higher than the level they were at three years ago.
Here, I’m going to provide my share price forecast for 2026. Let’s crunch some numbers.
Favourable backdrop
Before running some calculations, it’s worth looking at the backdrop here to set the scene. This will help to give some context to my assumptions and predictions.
Looking ahead, I think business conditions for BAE Systems are likely to be quite favourable. For a start, geopolitical risk remains high. Currently, there are multiple conflicts across the world, and these could potentially escalate and draw in other nations. So, no government can afford to take national security lightly.
Secondly, NATO members recently committed to increasing their defence budgets to 5% of GDP from 2% by 2035. That’s a huge increase and it’s likely to benefit BAE Systems in the years ahead. Note that BAE offers a broad range of defence solutions including fighter jets, warships, submarines, combat vehicles, air defence systems, munitions, advanced military electronics, and cybersecurity. So, it’s well placed to capitalise on the increased spending from NATO.
Where might the share price go?
Now, when it comes to making a share price forecast, there are several ways one can go about it. One straightforward way is to forecast earnings per share (EPS) for a particular year and then apply an earnings multiple to this forecast. I’ll use this strategy to keep things simple. However, I’ll also provide a ‘base case’ and a more optimistic ‘bull case’.
Currently, City analysts expect BAE Systems’ EPS to rise 12% to 84p in 2026. Let’s assume this forecast is going to be accurate.
For my base case, I’m going to assume that in 2027, earnings rise another 10%. That takes EPS to 92.4p.
As for valuation, I’m going to predict that in late 2026 investors believe that BAE Systems shares are worth 21 times forward-looking earnings (this is the earnings multiple now). That gives us a price target of 1,940p – 9% above the current share price.
For my bull case, I’m going to assume that in 2027, BAE Systems’ earnings rise 12% year on year. That takes EPS to 94.1p.
In terms of valuation, I’m going to predict that the market is willing to pay 23 times forward-looking earnings for the stock. That gives us a price target of 2,164p – 21% above the current share price.
Note that the stock currently has a 2% dividend yield. So investors could be looking at higher returns once dividends are factored in.
Worth a look
I need to stress that my earnings and valuation predictions could turn out to be way off the mark. So, the share price could end up being significantly lower (or higher) in 2026.
If geopolitical conflict suddenly dies down, the market may decide that defence stocks are not worth such high multiples. This could put pressure on the share price even if earnings are rising.
All things considered, however, I think BAE Systems shares have potential today. In my view, they’re worth a look at current levels.
