LONDON, March 3, 2026, 09:42 GMT
Shares of BAE Systems surged 6.1% on Monday, with Babcock International up 1.7%, defying a broader London selloff as investors responded to the escalating conflict involving Iran and the prospect of increased defence budgets. The FTSE 100 dropped 1.2%, market data showed. Citi’s Charles Armitage noted that BAE, with roughly half its revenue tied to the U.S., stands to benefit most from any boost in American defence outlays.
Defence stocks surged after Iranian counterstrikes upended shipping in the Strait of Hormuz, sending oil sharply higher and triggering a sell-off in risk assets. The weekend airstrikes by Israel and the United States killed Iran’s Supreme Leader Ayatollah Ali Khamenei. “If the issues persist, the market will start to worry about new inflationary pressures,” said Dan Coatsworth, head of markets at AJ Bell, citing the threat of rising energy prices pushing back near-term rate cuts. Reuters
Morgan Stanley pointed out that the conflict could sharpen Europe’s focus on security and strategic autonomy, a backdrop the bank says supports its “overweight” stance on the sector—Wall Street code for predicting outperformance. The bank also flagged that a longer period of instability may push Gulf defence spending higher, and referenced a signal from the White House aiming to boost the U.S. defence budget by roughly 50%, up to $1.5 trillion by 2027. Around 45% of BAE’s revenue is tied to the U.S., with another 10% from the Gulf, Morgan Stanley estimated. Shares in BAE fell about 2% early Tuesday, following gains the previous day. Sharecast
Turbulence isn’t limited to stocks. President Donald Trump told Reuters the operation against Iran might stretch out over “the next four weeks.” Investors are also keeping an eye on the Strait of Hormuz, which moves roughly a fifth of the world’s oil. Reuters
Defence names climbed across Europe, shrugging off declines in the broader market. London-listed Qinetiq jumped 3.4%, joining gains for BAE and Babcock, while Leonardo in Italy advanced 4.2%. Shares in Germany’s Rheinmetall ticked up 2%, according to City AM. “The conflict in the Middle East has further outlined the need for defence budgets to rise,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown. JPMorgan analysts pointed to BAE’s footprint in U.S. missile-defence, spotlighting its supply of an infrared seeker for THAAD — or Terminal High Altitude Area Defense — which is designed to intercept ballistic missiles. City AM
Air-defence demands are now surfacing in government briefings. Italy’s Defence Minister Guido Crosetto told lawmakers that Gulf states are seeking air-defence and anti-drone equipment as the conflict intensifies—including the Franco-Italian SAMP/T battery, known as MAMBA. “The Gulf countries are expressing strong concern,” Crosetto said. But he noted supply remains tight, with Italy already committed to delivering SAMP/T systems to Ukraine. Reuters
Babcock, the UK-based defence, aerospace and security contractor, spans marine, nuclear, land, and aviation segments—with services from naval ship support and submarine work to fleet management and pilot instruction. The breadth of its business ties Babcock closely to lengthy government projects, where shifts in public budgets and procurement schedules can be just as crucial as today’s news flow.
BAE stands out as a heavyweight in the UK defence sector and is a key player in the FTSE 100. Its reach extends across aerospace, naval, land, and electronic systems, a recent sector briefing shows. With its sizable operations and a broad international client list, BAE often serves as the market’s preferred proxy for “higher spending” bets tied to rising geopolitical tensions. Kalkine Media
But it’s hardly a one-way bet. U.S. Defence Secretary Pete Hegseth pushed back on talk of an “endless war,” insisting the campaign’s real objective is to take out Tehran’s missiles, navy, and security infrastructure — signaling this may not spiral into a lengthy conflict. Still, any rapid move at the diplomatic table or a squeeze on public finances could put a brake on the defense spending surge that’s been boosting contractors. Reuters
