Holders of Rolls-Royce (LSE: RR.) shares will be popping the champagne corks again in a few days and toasting another excellent year.
As I type this, those who had the courage to pick up the stock five years ago will have now seen their stakes soar 900% in value! Even those who only bought at the beginning of 2025 will have nearly doubled their money.
Make no mistake, this is as good an example as any to show how stock-picking has the potential to dramatically alter someone’s wealth.
But we know that no share price keeps rising indefinitely.
So, will 2026 be another banger or the year things start to unravel?
More gains on the way?
As things stand, the former feels more likely. Rolls-Royce continues to benefit from a lot of tailwinds.
Global air travel demand remains high. Put simply, more flying means greater demand for engines and aftermarket services (such as maintenance and repairs). The latter is hugely lucrative for the company.
Elsewhere, the £98bn cap has benefitted from the rise in defence spending. Considering the ongoing, increasingly-fragile geopolitical environment, I struggle to see how this won’t continue into 2026. The fact that these contracts are usually long-dated also provides the company with predictable revenue. And that’s something investors definitely like to see.
It also seems reasonable to suggest that Rolls-Royce shares can continue to ascend due to the popularity of CEO Tufan Erginbilgiç. Under his direction, the top-tier engineer’s balance sheet has been transformed. Free cash flow has also been rocketing, leading to the dividends being paid for the first time in five years.
What goes up…
On the other hand, it’s worth keeping a few things in mind.
First, there’s the rather frothy valuation. Based on current analyst estimates for FY26, Rolls-Royce shares change hands on 36 times earnings. This makes it one of the most expensive stocks in the FTSE 100.
Now, I don’t think it’s a good idea to judge a company solely on a single number. As the tech titans across the pond have shown, a stock can look overvalued on traditional metrics and just keep going up.
However, it does suggest that there’s little room for error.
That issue doesn’t even need to be internal. A merciful end to the conflict in Ukraine, for example, could push some investors to move on. We arguably saw a bit of this happening in November as peace talks were held (again).
Some kind of disruption to global air travel could be equally damaging for the share price, as would any significant problem in the supply chain.
More generally, a stock market correction or crash could see many high-quality companies chucked out with the bathwater. Even the firm’s most ardent backers might duck out, especially as the stock still doesn’t generate much in the way of passive income to compensate.
No sure thing
Look, identifying next year’s ‘winners’ isn’t easy. In fact, predicting the precise movement of share prices in the very short term is fiendishly difficult. I never thought Rolls-Royce shares would put in such a great performance in 2025!
Knowing this, I wouldn’t want to say a further move higher is improbable. But I’m questioning more than ever if that magnificent momentum can be sustained so I’m staying on the fence here.
