BAE Systems Shares Downgraded Following Strong Start To 2026 – The Latest

BAE Systems shares (LON:BA.) have delivered an impressive start to 2026, adding 12.06% through January and breaching the psychologically significant 2,000p level before settling at 1,965.50p. In the latest note from the analyst community, Jefferies downgraded BAE Systems from ‘Buy' to ‘Hold' to close out the month, whilst simultaneously raising its price target to 2,110p from 2,060p in somewhat of a mixed note.

The rally in the shares, driven primarily by heightened geopolitical tensions that shifted market focus toward defense spending, has prompted a wave of analyst adjustments as the shares approach what some now consider fair value.

Jefferies noted that 2026 commenced with escalating geopolitical tensions, creating an unfavourable environment for civil aerospace whilst bringing defense stocks back into sharp focus. The analyst adapted the firm's sector pecking order and ratings to reflect this shifting dynamic, concluding that BAE Systems now appears fairly valued following its strong performance.

The Jefferies downgrade followed a similar move by Bernstein earlier in January, which cut its rating from ‘Outperform' to ‘Market Perform' and reduced the price target substantially to 1,950p from 2,250p. Despite acknowledging BAE's position as a leading European defense contractor, Bernstein expressed concerns about potential underperformance during any European economic recovery, citing a lack of catalysts for further re-rating.

The firm anticipates cautious guidance for 2026, projecting topline growth of approximately 7-8%, broadly in line with market expectations.

Deutsche Bank also joined the downgrade chorus, moving BAE Systems from ‘Buy' to ‘Hold' and lowering its price target to 2,140p from 2,220p. The bank highlighted anticipated underperformance in the Maritime segment, with margins projected at 6.5% compared to management's guided 8%.

Whilst acknowledging better performance in the Air and Cyber & Intelligence divisions, Deutsche Bank expects free cash flow to reach £1.5 billion, below consensus estimates. Affordability concerns in both UK and US markets, coupled with uncertainty surrounding the new US administration's defense priorities, contributed to the revised outlook.

Against this backdrop of equity analyst caution, Fitch  provided a contrasting view on the company's fundamentals, upgrading BAE Systems' Long-Term Issuer Default Rating to ‘A-‘ from ‘BBB+'.

The ratings agency cited strong cash flow generation and profitability, anticipating that BAE's performance will benefit from its record order backlog and improving business profile. Fitch expects free cash flow margins to be robust, at a minimum of 4% in 2025 and 2026, before rising above 5% on a sustainable basis.

Analyst Summary: Bull and Bear Cases

The confluence of downgrades reflects a common theme: whilst BAE Systems remains well-positioned strategically within the defense sector, the recent share price appreciation has left limited upside at current valuations.

Markets have effectively priced in much of the geopolitical risk premium, leaving analysts questioning what catalysts might drive further gains. Momentum through 2025, and a strong start to 2026 positions BAE Systems share price 60.58% higher than this time last year. A word of caution from Wall Street may not be so bad.