Defence stocks tend to rise when war breaks out — not so for BAE Systems (LSE:BA.) shares, which have been on a rollercoaster since the Iran War started.

Over the last month, the FTSE 100 company has risen 2.5% in value. However, BAE’s share price only moved into the black for the period late last week as hopes of a ceasefire grew. A £5,000 investment here on 7 March would now be worth £5,125, a rise of £125.

The situation in the Middle East remains fluid and predicting where BAE shares will go in the near term is a tough task. Yet over a longer period, I’m optimistic the defence giant will go up. And up, and up…

Growing market

Unfortunately the geopolitical landscape is becoming more volatile. The Iran War is the latest chapter in an escalating cycle of conflict in the Middle East. War in Ukraine — and fears over further Russian expansionism in Europe — endure. There’s also tension in the West over Chinese military plans.

As a result, demand for BAE Systems’ services is booming. It’s a tier 1 supplier to big military spenders like the US and UK, as well as Saudi Arabia, Australia and Canada. And its huge range of services means it could benefit whether future potential conflict zones will be in the air, on land or at sea.

NATO nations are planning to hike military spending from 2% of their GDPs to 5% by 2035. What’s more, it has a strong presence in the US. As Hargreaves Lansdown analysts note: “US military spending trumps any other country in the world, so having large exposure to this market is proving very beneficial.”

This helped propel sales 10% higher in 2025.

High price

However, investors need to ask an important question: could all this be baked into BAE Systems’ share price today? If so, it could limit the potential for further share price gains.

At £22.70 per share, the FTSE firm’s forward price-to-earnings (P/E) ratio is 29.3 times. That’s more than double long-term average of 14 to 15, though it’s worth remembering the company’s earnings potential is stronger today than at any point in the last decade. This, in my opinion, makes it worthy of a premium rating.

However, that gigantic P/E multiple does create risk. Supply chain issues are significant across the defence industry. And with war widening in the Middle East, these threaten to get worse. BAE Systems also faces higher costs as spiking energy prices fuel broader inflationary pressures.

Investors have got used to the company topping expectations, giving it that princely valuation. Even the slightest sign of weakness going forwards could cause the market to re-rate its shares, sending it lower.

Are BAE Systems shares a Buy?

On balance, I think BAE Systems could be one of the FTSE 100’s hottest growth shares. City analysts expect earnings to leap 11% this year, and another 13% and 12% in 2027 and 2028 respectively. While not without risk, I feel it’s worth serious consideration right now.