The BAE Systems‘ (LSE: BA) share price has been in fine fettle in 2025. Those already backing the stock will be hoping for a similar performance next year. But might they be asking for too much?
Earnings explosion!
I guess the defence giant’s performance isn’t all that surprising considering the ongoing geo-political climate. The Russia-Ukraine war rumbles on, pushing governments of Western countries to spend like there’s no tomorrow on advanced weapons and platforms to protect themselves.
Naturally, this has done no harm to BAE’s coffers. The FTSE 100 member has been announcing new deals throughout 2025. Just last Wednesday (10 December), there was news that it had been given a five-year contract with the US Navy to provide laser guidance kits for rockets. The value of the deal? Up to a cool $1.7bn.
With such an earnings tailwind, the 47% increase in the shares in the year to date feels somewhat justified.
But has the investment case turned?
Even so, the stock was a lot higher a couple of months ago. Since peaking above 2,000p in early October, the BAE price has dropped by 20%.
Now, nothing in the market rises in a straight line. And there’s been no shortage of general economic concerns to worry all investors lately.
But I suspect at least some of this decline is due to some owners taking profit, especially if they believe that peace in Eastern Europe is drawing closer. Only last night, leaders from Ukraine, Europe and the US were meeting in Berlin to discuss a possible settlement.
This explanation becomes even more compelling when we look at the valuation.
BAE shares aren’t cheap
The shares currently change hands for almost 23 times forecast 2025 earnings. That’s the sort of price tag one might slap on a mid-cap growth stock, not a £51bn top-tier juggernaut. It’s also far higher than the firm’s average price-to-earnings (P/E) ratio of 16 over the last five years.
Based on this, it doesn’t seem controversial to suggest that a lot of good news looks to be baked in.
This isn’t to say that the recent negative momentum will definitely continue. But it does imply that investors could be in for a rough ride if 1) a peace deal is agreed as we all hope and/or 2) there are any issues in BAE’s ability to meet orders from this point on.
Of course, the movement of the share price might not be all that important for some holders. Let’s not forget this business has been a wonderful source of uninterrupted and rising dividends over many decades.
It goes without saying that this passive income is never guaranteed. But it would be a big shock if management were forced to make a cut, at least for now.
One to tuck away?
It’s these dividend credentials, combined with the fact that the world will never unfortunately be free of bad actors, that make me think BAE remains a solid pick to consider for the long term.
At the same time, I think it could struggle to replicate the huge increase seen this year in 2026, unless there’s evidence that Russia is setting its sights beyond Ukraine.
And if that were to happen, we’ll probably have other things to worry about than where the stock’s heading.
