The BAE Systems (LSE: BA.) share price rocketed 17% higher today (3 March) to reach 1,642p. The whole European defence sector is surging, including Rolls-Royce stock, which rose 6% and neared 800p!

BAE is now up 30% in 2025, ranking it among the FTSE 100‘s best-performing shares year to date. Here’s why it’s flying higher.

Paradigm shift

On 28 February, President Donald Trump met with Ukrainian President Volodymyr Zelenskyy at the White House to discuss a minerals deal and an end to the war with Russia. To say it didn’t go well would be an understatement. 

Following this, Trump supporter Elon Musk even publicly expressed support for US withdrawal from NATO. Needless to say, all this has profound ramifications for European security.

At the Ukraine defence summit hosted by Keir Starmer over the weekend, NATO and European leaders agreed to bolster defence support for Ukraine and emphasised the urgent need for Europe to rearm. European Commission President Ursula von der Leyen explicitly stated that budgetary rules could be adapted to make that happen.

Meanwhile, a Reuters report says that the incoming German government is considering a defence fund. This is quite the turnaround. Famously under von der Leyen’s tenure as Germany’s Defence Minister, reports emerged of German soldiers using broomsticks instead of machine guns during NATO exercises due to severe equipment shortages.

BAE chief executive Charles Woodburn recently called this a “paradigm shift“. I don’t see that comment as exaggerated.

For European defence firms like BAE, tens of billions of pounds and euros worth of contracts will likely be up for grabs.

Solid growth

Last year, the company reported sales of £28.3bn, with the order backlog growing 11% to a record £77.8bn. For 2025, it expects sales to increase by 7%-9% and underlying earnings per share to rise 8%-10%.

But that guidance was before last week’s events. Investors are probably expecting a double-digit rise in revenue and earnings now.

As for the dividend, that was hiked 10% last year, and analysts expect a 9% increase this year, then 10% in 2026. While no dividend is guaranteed, the prospective payouts are covered more than twice by forecast earnings.

However, following the strong share price rally, the forward yield is only around 2.2%.

What could go wrong?

While Europe is facing up to the reality of rearming, the US is looking to cut its military budget. So that could be a risk to BAE’s order growth, especially as America is currently its largest market.

Also, Saudi Arabia is a major buyer of BAE equipment (such as Typhoon fighter jets). However, it has strengthened defence ties with China and Russia. If Saudi Arabia shifts away from Western suppliers, BAE’s revenue from the region could decline.

Should I buy the shares?

We all want peace in Ukraine. But sadly, that won’t change the reality that the US-led international rules-based order — built on international law and multilateral institutions following World War II — appears to be collapsing. Two immediate consequences of this are rising instability and higher military spending.

I invested in BAE stock in 2022 at 819p, then again at 1,158p just before Christmas. But it’s now trading at around 24 times earnings, which I think is quite high. Therefore, I’ll wait for dips before I consider buying more shares.