Prediction: move over Rolls-Royce, the BAE share price could climb another 45% in 2026

Morgan Stanley raised its target for the BAE Systems (LSE: BA.) share price to 2,203p just before Christmas, nearly 30% ahead of the price, at the time of writing. But that’s not the most ambitious prediction, after UBS put a 2,500p label on the stock at the end of September. That would be a gain of around 45%.

BAE Systems’ shares have risen 49% in 2025 and are up 240% in five years. That’s impressive, but it doesn’t match Rolls-Royce Holding‘s doubling in 2025 and five-year climb of 890%. So will 2026 be the year BAE pulls ahead in the growth stakes? Let’s take a look.

Peace prospects

And end to the war in Ukraine can’t come soon enough. But judging by the BAE share price dropping off a bit as talks continue, it looks like the market thinks it could dent defence sector profits. Yet I’m not sure it really will, because I see more of a long-term shift.

According to UK government data in December, NATO defence spending rose 10% in 2024. And it looks like we’re on for new records in 2025. At this year’s NATO summit, allies committed to raising core defence spending to at least 3.5% of GDP by 2035. This is not a one-off response to the Ukraine war. It’s a strategic reassessment of long-term priorities based on an increasingly hostile world.

On top of that, current conflicts have used up significant proportions of Western defence assets. And restocking could take quite a few years yet, keeping the profits going.

The analysts say…

Analyst forecasts for BAE don’t suggest any let-up in spending either. They show earnings per share (EPS) rising steadly, increasing 40% between 2024 and 2027. That would drop the price-to-earnings (P/E) ratio from the expected 24.5 this year to a bit over 19 by 2027.

And that raises a definite red flag to me — valuation. A stock with solid growth potential can command a premium valuation. But I’m not sure there’s enough safety margin here for me. And with an expected dividend yield of just 2%, there’s not a lot of income to compensate.

Still, along with those upbeat BAE share price targets, analysts are bullish on their recommendations. A look at 20 analysts shows 14 rating the stock a Buy, with only two having it as a Sell. I think the consensus might be calling this one right.

Bullish outlook

Analysts aren’t the only ones seeing a positive future. The company posted a trading update in November. And for the full year, it expects sales to grow between 8% and 10%, lifting underlying EBIT between 9% and 11%, with underlying EPS up 8% to 10%.

And though the dividend yield might not be high, BAE plans to return around Â£1.5bn to shareholders in 2025, including Â£500m in share buybacks.

But I can’t get away from the high-ish valuation, and I do feel that could hold the shares back next year. But for me, this is a great company at a fair enough price — the kind billionaire investor Warren Buffett likes. It’s got to be a top defence stock consideration for 2026.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.