BAE Methods (LSE: BA.) shares have been performing very strongly currently. Certainly, since Santa got here and went, the FTSE 100 inventory is up 34.5%.

Which means an investor who put £10,000 into the defence big simply earlier than Christmas would now have £13,450. And a dividend is due in early June, which might add one other £178 to the return.

I point out Christmas as a result of that’s the interval once I final purchased BAE shares. Thoughts you, it was a good bit lower than 10 grand that I invested! Nevertheless it was an addition to my present holding, which has carried out very nicely since I initiated it in 2022.

European defence shares go ballistic

BAE belongs to the European defence sector and this has been on a tear just lately. The rally was sparked by President Trump’s determination to pause US army help to Ukraine. This has compelled Europe into a serious rethink on defence spending and safety independence.

Some features for European defence shares have been unbelievable. Germany’s Rheinmetall has rocketed 112% yr to this point and 1,340% in simply over three years! Sweden’s Saab is up 65% in 2025 and 750% over 5 years.

In a press assertion final month, the European Fee’s president introduced: “Europe is ready to assume its responsibilities. ReArm Europe could mobilise close to €800bn for a safe and resilient Europe. We will continue working closely with our partners in NATO. This is a moment for Europe. And we are ready to step up.”

Poland is predicted to spend 4.7% of GDP on defence this yr, up from 2.4% in 2020. Nonetheless, additional away from Ukraine, nations like France, Italy, and Spain wish to enhance army spending via grants moderately than growing their debt masses.

So, as is usually the case, not all EU nations are singing from the identical hymn sheet. However a future that includes huge spending will increase on European-made defence techniques is now virtually sure.

What about BAE?

In principle, BAE ought to profit from this, however it’s a bit extra complicated. What if the European rearmament fund largely shuts out non-EU corporations like BAE? I don’t suppose that’s seemingly, however it may well’t be dominated out.

Additionally, over 40% of the corporate’s income got here from the US final yr. However there’s uncertainty surrounding the effectivity drive throughout the pond. This reliance on US contracts underscores the agency’s publicity to shifts in American defence spending insurance policies.

In the meantime, the UK authorities is dedicated to lifting defence spending to three% of GDP in the course of the subsequent parliament, up from the present 2.3%. It goals to construct a “defence industrial superpower“, although that shall be a troublesome job provided that the UK has now largely deindustrialised.

Taking inventory

Due to this fact, it’s attainable that BAE’s progress doesn’t match the lofty expectations baked into its present valuation. That could be a trailing price-to-earnings (P/E) ratio of 24.3, which isn’t low-cost.

I stay bullish on BAE long run although, because of its huge £77.8bn order backlog reported on the finish of 2024. I’ve confidence that it’s going to navigate the complexities of US and EU defence spending insurance policies.

Due to this fact, I feel the inventory is price contemplating for long-term buyers. Personally although, I’ve chosen to construct out my place on dips — just like the one at Christmas — moderately than going all in.