We’re less than a fortnight into a new year, and already BAE Systems (LSE: BA) shares have been turbocharged by extraordinary geopolitical developments. The FTSE 100 defence stock has gained 20% in January so far. It’s now on the cusp of reaching a new 52-week high.
After such an explosive start to the year, investors will be asking whether shares in Europe’s largest arms manufacturer still offer good value at a near-record valuation. Here’s where I think the BAE Systems share price could go in 2026.
An evolving world order
The world’s defence and security landscape is changing rapidly. In recent days, the US has captured Venezuelan President Nicolás Maduro, openly discussed a military takeover of Greenland, and proposed a 50% jump in its defence budget to $1.5trn for 2027. Moreover, Britain and France have committed to boots on the ground in Ukraine if a peace deal is reached with Russia.
Tragically, heightened global militarisation seems here to stay, and BAE Systems shares are thriving in this environment. The company manufactures military aircraft, warships, submarines, combat vehicles, drones, and electronic warfare capabilities. Given the nature of the beast, some investors will understandably have ethical concerns about investing in such a business.
Growth opportunities
However, the investment case for BAE Systems shares looks compelling to me and they have a presence in my own portfolio. Nearly half of the group’s revenue comes from the Pentagon. A recent $1.7bn contract to supply the US Navy with laser-guided rocket kits was an impressive achievement. The massive increase in US military expenditure proposed by President Trump could bring further opportunities for the firm.
Expansion opportunities are abundant in the UK and Europe too. As the US becomes more active in its own hemisphere and pressures European governments to take more responsibility for their defence, rearmament efforts have gained fresh impetus. The European Commission is seeking to mobilise €800bn for defence infrastructure by 2030.
There’s a risk BAE Systems could be sidelined by the initiative’s ‘buy European’ approach in a post-Brexit world. That said, its existing partnerships with German and Italian defence contractors Rheinmetall and Leonardo look set to deepen over the coming years, giving the firm a strong foothold on the continent.
A premium valuation
In my view, global market conditions look very favourable for the BAE Systems share price to continue rising this year and beyond. However, the forward price-to-earnings (P/E) ratio of nearly 24 is well above the stock’s historical average.
The high valuation can be justified by a huge £75.4bn order book, but investors shouldn’t overlook operational risks facing the company. Supply chain disruption is a major concern. China has tightened export controls on critical minerals and metals that are essential for semiconductors, radar, missiles, and aircraft components.
This could result in margin erosion and production delays. At today’s premium valuation, there’s not much of a safety buffer against sell-offs that could materialise as a result.
Too late to consider buying?
I already invest in BAE Systems shares, and I’ll be holding my position. In the current febrile geopolitical climate, I want exposure to the defence sector in my portfolio. This FTSE 100 firm is a very high-quality player in that arena.
Even at today’s level, the stock is still worth considering for new investors. But overvaluation risks are rising and should be monitored closely.
