The year 2025 will go down as one of the FTSE 100‘s best-performing years this century, and even still, Rolls-Royce (LSE: RR.) shares have smashed the index average. The share price is up 87% since 1 January.
That makes it three years in a row that the stock has nearly doubled in value. How much would a £10,000 stake have earned in 2025? And could it repeat the trick in 2026?
Good year
It’s worth pointing out that Rolls-Royce shares were not considered a bargain at the start of the year. Many commentators were looking at the turnaround as being over and, perhaps, the shares looking a little overbought.
The reason for the shares to continue surging was booming demand across practically every division.
Flying hours surpassing pre-COVID levels boosted its aeroplane engine sales. Governments making good on pledges to increase military spending helped its defence division. Its power systems segment saw an increase in orders because of their role in AI data centres.
The icing on the cake was the confirmation that Great British Energy had chosen Rolls-Royce to build its first SMRs (a type of small nuclear power plant). Although the sales earned were on the smaller side for now, these small reactors could be the energy of the future as we transition to greener energy.
The demand was seen keenly in very strong first-half results which beat market expectations and saw full-year guidance upgraded. The Rolls share price jumped 11% in that week alone.
All this has resulted in a share price that has been surging. When we add the dividend payments through the year, a £10,000 stake in Rolls-Royce shares at the start of the year would now be worth £19,044 by my calculation.
What’s next?
After such a large runup, it’s worth looking at the valuation to check that a stock isn’t looking pricey. I’ll use the forward price-to-earnings ratio – a measure of how much the share price costs compared to the next 12 months of forecast earnings.
The Rolls-Royce forward P/E ratio sits at 34 based on the latest data. That’s pretty expensive. The FTSE 100 average is around 19 at the moment. One way of looking at this: investors are expecting growth in the years ahead. Some future increase in earnings is, so to speak, baked into the share price.
Another downside of such a lofty valuation is that the shares have further to fall. Higher P/E stocks can be a recipe for disaster in the event of some market turbulence.
So, what to expect from 2026? I expect the momentum built up over the last years to continue and I’d still say this is a good investment worth considering. Another near doubling of the share price would be quite extraordinary given the current valuation, however.
