Introduction

The phrase “space race” used to evoke Cold War rivalries and grainy moon landings. In 2026, it describes something quite different: a fiercely competitive global push to militarise, monitor and commercialise low Earth orbit and beyond. As governments rewrite defence priorities for a contested space domain, FTSE 100 stalwart BAE Systems (LSE:BA.) is positioning itself for what could be a multi-decade growth opportunity. With its Ascent spacecraft programme unveiled, broader space capabilities expanding and core defence backlogs at record levels, the question for UK investors is whether BAE Systems shares can continue to soar as defence spending moves firmly into space.

Why space is the new defence frontier

Modern warfare relies on satellites. From GPS-guided munitions to encrypted communications, intelligence gathering, missile early warning and battlefield connectivity, virtually no major defence operation can function without space infrastructure. As geopolitical tensions intensify, the protection and resilience of orbital Assets has become a top priority for advanced militaries.

In response, governments are funding new constellations of satellites, anti-satellite defences, ground-based space surveillance, and increasingly, the ability to operate spacecraft at scale. The UK has formed Space Command, the US has stood up Space Force, and major allies are following suit.

The result is a structural shift in defence budgets toward space – an area where BAE Systems has been quietly expanding its capabilities.

BAE Systems’ growing space footprint

BAE Systems already has a presence across several space-relevant disciplines, including:

  • Secure satellite communications and electronic warfare
  • Cyber and intelligence services
  • Sensor systems and signal processing
  • Mission systems for advanced air platforms that integrate with space Assets

The recently unveiled Ascent spacecraft programme is the natural extension of these capabilities into a fully fledged space platform. Ascent is designed to support a range of mission types, providing customers with a flexible foundation that can be configured to specific needs.

Coupled with other parts of the group – such as its US-based intelligence and electronic systems Business – BAE Systems has the foundations of a credible mid-tier space integrator, sitting just below the very largest US primes but with growing potential to compete on selected missions.

How significant could space become for BAE Systems?

In the near term, space is likely to remain a relatively small part of BAE Systems’ overall Revenue. Its core businesses in air, sea and land defence, plus cyber and intelligence, will continue to dominate. However, the rate of growth in space could outpace the wider group for some time.

If BAE Systems can establish itself as a preferred supplier to the UK Ministry of Defence and selected allied governments, space could become a meaningful growth engine over the next decade. This kind of long-runway opportunity is exactly the type of structural growth narrative that supports higher valuations for defence stocks.

Defence budgets at multi-decade highs

The macro environment has been kind to BAE Systems shareholders. Several factors are converging:

  • NATO members are committing to higher defence spending, with many at or above 2% of GDP and several pushing toward 2.5%-3%
  • The UK government has reaffirmed its commitment to long-term defence Investment
  • The US defence budget continues to set new records
  • AUKUS, GCAP and other multinational programmes provide multi-year Revenue visibility
  • Growing concern about Russian and Chinese capabilities is sustaining Demand for advanced systems

Against this backdrop, even modest share gains in the space segment could meaningfully add to BAE Systems’ growth.

Recent share price performance

BAE Systems shares have been on a remarkable run. Since the start of the war in Ukraine, the company has consistently delivered upgrades to backlogs and Earnings forecasts, and the share price has reflected that. Long-term investors have enjoyed substantial total returns, supported by rising dividends and Buybacks.

Even with the rally, the company’s valuation reflects expectations of continued growth, particularly in international markets, advanced platforms and space.

Could BAE Systems shares soar from here?

The bull case for further gains rests on:

  • Continued increases in NATO defence spending
  • Strong execution on Type 26 frigates, Eurofighter, F-35 components and other major programmes
  • New wins in space, cyber and electronic warfare
  • Ongoing share Buybacks and Dividend growth
  • Possible bolt-on acquisitions in higher-growth segments

If BAE Systems delivers on these fronts, the shares could continue to grind higher, even from already elevated levels. Total Shareholder returns over the medium term could remain attractive.

The bear case includes:

  • A sudden de-escalation reducing political appetite for defence spending
  • Programme delays or cost overruns
  • Currency headwinds
  • Multiple compression if global defence sector valuations normalise

Why the space narrative matters for valuation

Stock multiples are heavily influenced by growth expectations. A defence company seen primarily as a UK-centric platform builder will trade differently from one viewed as a multi-domain growth story spanning land, sea, air, cyber and space. Ascent and the broader space push are valuable, in part, because they reinforce the latter perception.

If BAE Systems can credibly position itself as a global space-capable defence contractor, its valuation can stretch a little further. That, more than near-term contract awards, may be the most important investor implication.

Capital returns: not just growth

It is easy to focus on the growth narrative, but BAE Systems has also been a reliable Capital returner. Dividends have grown for many consecutive years, and share Buybacks have become a regular feature. Per-share metrics have benefited accordingly.

For UK income investors, BAE Systems may not be the highest-yielding FTSE 100 share, but it offers a balance of moderate income and growing payouts.

Risks to the thesis

Investors should be alive to several risks. Defence stocks are sensitive to political change. ESG screening still excludes some funds from holding the sector. Programme execution can falter. Valuation is no longer rock bottom, leaving less Margin for error. Space, while exciting, is itself a highly competitive arena, with US giants, European peers and a wave of new entrants all vying for contracts.

Considerations for UK investors

For long-term investors, BAE Systems remains one of the cleanest plays on the structural rise in global defence spending and the growing importance of space. It is best held as part of a diversified portfolio, alongside other UK and global stocks across various sectors. Its share price will not move in a straight line, and periods of underperformance are inevitable.

Conclusion

The defence story has evolved, and so has BAE Systems. Once known largely for jets, frigates and armoured vehicles, the company is increasingly a player in the high-tech, multi-domain warfare of the 21st century, including space. Ascent and the wider space push position it for the next wave of defence spending growth. Combined with strong order books, supportive geopolitics, and disciplined Capital returns, BAE Systems shares retain a credible long-term Investment case. They may not soar in a straight line, but as the world spends more in orbit, the FTSE 100 group looks well placed to participate.