When I first started investing many years ago, BAE Systems (LSE: BA.) shares were regarded as a fairly pedestrian holding. People tended to own them for the dividends and not much more. Capital growth wasn’t particularly easy to come by.

Fast-forward to 2026, however, and that perspective has completely changed. Even someone buying into BAE at the start of the year would still have done marvellously well in such a short period of time.

Top performer

As I type, the share price is up 26% since markets opened in January. For comparison, the FTSE 100 index in which BAE features is up around 6%. The tech-stuffed S&P 500 is barely in the black.

Put another way, a £10,000 investment would now be worth £12,600. I don’t know about you but I’d say that’s a pretty spectacular return. It’s also more evidence that your average retail investor — with a bit of luck and skill — can outperform the market without needing to back some obscure AI-related penny stock.

As things stand, there’s just one problem I have with all this: the current valuation. Based on analysts’ forecasts, the stock now changes hands for 27 times earnings. Back in the day, the price-to-earnings (P/E) ratio was below 10!

Another thing worth noting is the substantial director sells in March and April, including a multi-million pound dumping of stock by Chief Financial Officer Bradley Greve. This isn’t necessarily a cause for panic among owners. But it does imply that these very informed people were keen to take some profit off the table.

Strong outlook for BAE shares

Then again, there is still lots to like about BAE shares from my perspective.

In the short term, it doesn’t look like the US-Iran war is likely to end anytime soon. Even if it does, the unpredictability of President Trump will surely keep markets on tenterhooks for the remainder of his term. Remember — he’s not due to officially leave office until January 2029.

Looking further ahead, the geopolitical shenanigans of the last few years, combined with the Russian invasion of Ukraine, have sent shivers up the spines of governments around the world. As a result, defence spending has increased. On a human level, I’m not sure that’s comforting. From an investment perspective, it suggests owners of BAE Systems won’t need to worry about a significant dip in trading.

On top of this, the aforementioned dividends remain attractive. While the yield stands at just 1.8% because of the incredible momentum seen in the share price, this cash distribution looks set to be easily covered by expected profit. The company also has a brilliant multi-decade track record of raising the total payout every year. Usual warnings aside, I expect BAE to maintain its status as a more-reliable-than-most source of passive income going forward.

So, in many ways, that valuation does make sense.

More gains ahead?

All told, I tip my Foolish hat to anyone who snapped up this stock recently. Even though further capital growth may be increasingly harder to achieve, I certainly don’t think those committed to holding for the long term would be making a catastrophic error.

BAE Systems is in a purple patch, no doubt. But this example shows that positive momentum in the stock market can last a lot longer than one might expect.