The BAE Systems (LSE:BA) share price has had a great run in the last year, climbing by almost 25%. However, there are threats to the FTSE 100 company’s gains as there is some worry about the US economy’s fate.
What caused these fears?
US jobs data for July was far weaker than expected, with US employers creating only 114,000 jobs in the month compared to the 175,000 anticipated. At the same time, the unemployment rate has risen to a near three-year high of 4.3%.
The US economy is not technically in a recession right now, but there are concerns that these are indicators that it could soon be in one.
If it does, the old adage of ‘When America sneezes, the world catches a cold’ means it could be quite impactful on our side of the Atlantic.
We’ve already seen turbulence in the FTSE 100, which fell 2% on Monday (5 August). This is by no means a market crash (defined as a rapid market drop of more than 20%) and the Footsie has since recovered by almost 1% since Monday’s close. However, if the US economy ends up falling into a recession, then we could end up seeing one.
As a Foolish investor, I understand that historically stock markets go up over the long term. Therefore, if the BAE Systems share price falls, it could be a chance for me to scoop some of them up.
Great prospects
Looking at the company’s half-year results for 2024, we can see that it performed very well.
Revenue has grown by 13% to hit £12.5bn and operating profit also saw a rise of 5% to reach £1.3bn.
As an income investor, it’s also encouraging to see that the dividend was raised to 12.4p per share.
What’s not so great about the reality of the world is that war seems to be more prevalent. As a result, NATO members have committed to raising defence spending to 2% of GDP. Keir Starmer is also planning to raise UK defence spending to at least 2.5%. Furthermore, as the wars in the Middle East and Ukraine rage on, BAE Systems should continue to see demand for its military equipment rise as one of the world’s largest defence contractors.
Moreover, the company is looking to remain at the forefront of military technology, stating that it’s looking to buy more companies that design and make drones.
Now what?
I do have a couple of concerns with BAE Systems. Firstly, the strong demand we’re seeing right now is resulting from growing geopolitical tensions. If these were to ease, then demand for its products and services could fall.
Secondly, its shares aren’t exactly cheap, currently trading at a price-to-earnings (P/E) ratio of 21.6.
Having said that, in the event of a stock market crash, I’d buy some of its shares, if I had the spare cash to do so. This is because they’d be cheaper if the share price dropped. Unfortunately, it also doesn’t look as though wars around the world are going away soon, which provides an environment for BAE Systems to thrive.
