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Morgan Stanley raised its target for the BAE Systems (LSE: BA.) share price to 2,203p just before Christmas, nearly 30% ahead of the price, at the time of writing. But that’s not the most ambitious prediction, after UBS put a 2,500p label on the stock at the end of September. That would be a gain of around 45%.
BAE Systems’ shares have risen 49% in 2025 and are up 240% in five years. That’s impressive, but it doesn’t match Rolls-Royce Holding‘s doubling in 2025 and five-year climb of 890%. So will 2026 be the year BAE pulls ahead in the growth stakes? Let’s take a look.
Peace prospects
And end to the war in Ukraine can’t come soon enough. But judging by the BAE share price dropping off a bit as talks continue, it looks like the market thinks it could dent defence sector profits. Yet I’m not sure it really will, because I see more of a long-term shift.
According to UK government data in December, NATO defence spending rose 10% in 2024. And it looks like we’re on for new records in 2025. At this year’s NATO summit, allies committed to raising core defence spending to at least 3.5% of GDP by 2035. This is not a one-off response to the Ukraine war. It’s a strategic reassessment of long-term priorities based on an increasingly hostile world.
On top of that, current conflicts have used up significant proportions of Western defence assets. And restocking could take quite a few years yet, keeping the profits going.
The analysts say…
Analyst forecasts for BAE don’t suggest any let-up in spending either. They show earnings per share (EPS) rising steadly, increasing 40% between 2024 and 2027. That would drop the price-to-earnings (P/E) ratio from the expected 24.5 this year to a bit over 19 by 2027.
And that raises a definite red flag to me — valuation. A stock with solid growth potential can command a premium valuation. But I’m not sure there’s enough safety margin here for me. And with an expected dividend yield of just 2%, there’s not a lot of income to compensate.
Still, along with those upbeat BAE share price targets, analysts are bullish on their recommendations. A look at 20 analysts shows 14 rating the stock a Buy, with only two having it as a Sell. I think the consensus might be calling this one right.
Bullish outlook
Analysts aren’t the only ones seeing a positive future. The company posted a trading update in November. And for the full year, it expects sales to grow between 8% and 10%, lifting underlying EBIT between 9% and 11%, with underlying EPS up 8% to 10%.
And though the dividend yield might not be high, BAE plans to return around £1.5bn to shareholders in 2025, including £500m in share buybacks.
But I can’t get away from the high-ish valuation, and I do feel that could hold the shares back next year. But for me, this is a great company at a fair enough price — the kind billionaire investor Warren Buffett likes. It’s got to be a top defence stock consideration for 2026.
