LONDON, Jan 12, 2026, 08:22 (GMT)
- Shares of BAE Systems climbed roughly 2% on Monday, hovering close to a 52-week peak
- Investors remain unsure about how much of the defence-spending boost has already been factored into prices
- Analysts point to budget politics and lofty valuations as key drivers of market swings
BAE Systems shares climbed 2% on Monday, reaching 2,094.94 pence—just shy of their 52-week peak at 2,098.00 pence. This pushed the company’s market cap to roughly 61.1 billion pounds. The stock kicked off trading at 2,084 pence, up from Friday’s close of 2,053, data from show.
The move keeps Britain’s biggest defence contractor in the thick of a trade that’s lost some of its edge: buy defence first, ask questions later. But those questions are growing louder, focusing on budgets and valuations.
The rally picked up pace last week after U.S. President Donald Trump proposed a $1.5 trillion military budget for 2027, a sharp jump from the $901 billion approved for 2026. He also suggested capping dividends and share buybacks until defense contractors boost weapons production. RBC Capital Markets analysts, led by Ken Herbert, noted that a larger budget might offset these payout restrictions but flagged “significant uncertainty” around the final defense bill. Neil Wilson, Saxo Bank’s UK investor strategist, described geopolitics as “the inescapable story of 2026 thus far.” Meanwhile, Investec’s Ben Bourne said the U.S. moves could drive investors toward UK companies with strong U.S. ties. Reuters
Edmond Jackson at interactive investor pointed to BAE as a key winner, noting that nearly half its revenue comes from the U.S., which is expanding faster than other markets. He highlighted a hefty order backlog — contracts signed but not yet fulfilled — topping 75 billion pounds as of June 30, compared to a market cap of 60.7 billion pounds at that point. Still, he warned that backlog figures can sometimes overstate a contractor’s position. Jackson described the stock as “fully valued,” with a forward price/earnings ratio around 27 times, advising long-term investors to maintain a cautious “hold” view. Interactive Investor
Simply Wall St’s latest valuation put BAE’s fair value at 21.01 pounds, just above its recent close of 20.23 pounds. Their most followed model suggests the shares are roughly 3.7% undervalued. The stock trades at a P/E of 30.5, notably higher than the 23.6 average for its peers. The note also highlighted potential ESG headwinds tied to defence exposure and the risk that large, long-term government contracts might shift.
The stock is now priced assuming steady upgrades, leaving minimal margin for any budget hiccups or interruptions in order flow.
But the numbers on the budget side could pose as much of a threat as geopolitics. David Rogovic, senior VP at Moody’s sovereign risk group, called a 50% boost in defense spending “highly unlikely to be offset” by cuts elsewhere, warning it would blow out already massive U.S. fiscal deficits. The Committee for a Responsible Federal Budget estimates Trump’s plan would rack up $5 trillion in costs through 2035, pushing total debt, including interest, $5.8 trillion higher. Reuters
Washington might increase spending, but Congress holds the final say—and the route isn’t straightforward. Changes in priorities, pushback against contractor profits, or stricter caps on shareholder payouts could stall progress, turning the deal into a stop-and-go affair.
