The British stock market just had a phenomenal year. Specifically, the FTSE 100 delivered a jaw-dropping 25.8% total return including dividends!
That’s the largest gain UK index investors have enjoyed since 2009. And it even outpaced the tech-heavy S&P 500 by almost 10%. As such, anyone who invested £5,000 at the start of 2025 entered 2026 with roughly £6,290.
So the question now becomes, will the FTSE 100 do it again?
What to expect in 2026
The stock market has entered the new year with strong momentum, with the UK’s flagship index even surpassing the coveted 10,000 point threshold for the first time ever. But it seems this momentum’s set to continue.
With large-cap corporate earnings expected to yet again break records, the Bank of England further slashing interest rates throughout the year, and valuations still looking attractive compared to global peers, institutional analyst projections are largely positive.
Analysts at AJ Bell have forecast the FTSE 100 to rise to 10,750, while the experts at UBS have placed their bets at 10,800 points.
Seeing more growth on the horizon is obviously encouraging. But if these projections are accurate (which isn’t guaranteed), that does sadly indicate that 2026 likely won’t deliver a similar 25% gain this year. Instead, current expectations suggest a gain closer to 10% after dividends.
Ten percent is certainly nothing to scoff at. After all, it remains ahead of the stock market’s 8% long-term historical average. But by picking individual stocks, investors can potentially earn considerably more.
A top growth pick for 2026?
While UBS’s FTSE 100 forecast isn’t earth-shattering, its stance on BAE Systems (LSE:BA.) is far more exciting. In fact, it’s recently issued a 12-month share price target of 2,500p – 33.3% higher than where the defence stock trades today.
At the heart of this forecast lies the theme of global rearmament. With NATO allies drastically ramping up their defence spending in a world of rising geopolitical tensions, defence contractors like BAE are enjoying a bit of a gold rush.
In 2025, the company secured over £27bn of new contracts, growing its order backlog to a record £75.4bn, providing unparalleled multi-year revenue visibility.
With earnings expected to grow by double digits and free cash flow generation exceeding £1bn thanks to margin expansion, UBS’s prediction seems to hold some weight. And if it proves to indeed be accurate, that means a £5,000 investment today could grow to over £6,600 before counting dividends.
There’s always risk
In this context, BAE Systems seems like a no-brainer for anyone who doesn’t mind the idea of investing in defence. However, even bulls like UBS have highlighted some critical risks.
Record order books are only encouraging if the underlying business can fulfil its obligations to customers. BAE has the advantage of scale on its side. But any unexpected disruptions to its production ramp-up could delay revenues, as we’ve recently seen in 2023 with its electronic warfare kits for the F-15.
Even if BAE executes flawlessly, external supply chain interruptions or delays among its peers could slow down delivery of group contracts, similarly impacting its performance.
Nevertheless, given the supportive environment and seemingly persistent tailwinds surrounding this enterprise, BAE Systems may be worth a closer look for my growth portfolio.
