BAE Systems PLC (LSE:BA.) shares could be in line for a rerating, according to Citi, after reports that the Trump administration is preparing to request a record $1 trillion US defence budget for the 2026 fiscal year, a 12% jump from the current $892 billion.
The expected increase, flagged by Politico, comes as Washington doubles down on military spending under President Trump and Defence Secretary Pete Hegseth.
For BAE, which generates roughly half its revenues from the US, the prospect of a significantly larger Pentagon budget could help ease investor concerns over long-term demand.
Citi argues that BAE has been trading at a discount to its European rivals despite similar financial performance.
The group currently trades on 16.1x forecast 2025 EV/EBIT, versus 20.1x for Thales and 18.6x for Leonardo.
All three are posting high-single-digit revenue growth and strong cash conversion, with BAE and Thales converting between 90% and 100% of their cash flow.
While Thales and Leonardo have more exposure to civil aerospace and digital systems, BAE’s business is heavily skewed to core defence, a profile Citi sees as increasingly attractive in the current geopolitical environment.
A US defence budget tipping into 13-figure territory is, as Citi puts it, a potential catalyst for the shares to close the valuation gap.
The bank expects the announcement to help reassure investors that US defence spending is not only robust but likely to accelerate.
For BAE, that could mean stronger order visibility, better earnings support, and growing alignment with investor demand for stable, defence-led exposure in volatile markets.