Rolls-Royce Shares Surge on Defense Sector Momentum

Rolls-Royce GB00B63H8491

A potent combination of geopolitical instability and robust operational performance has propelled Rolls-Royce shares to a series of new peaks in early 2026. Investors have cheered the engineering giant's strategic repositioning, yet the stock's steep climb has begun to raise questions about its sustainability given a valuation that now appears stretched.

While often cast as a defense play, Rolls-Royce's growth narrative is more nuanced. A significant and sometimes overlooked contributor is its Power Systems division. This unit, specializing in engines for naval vessels and submarines, is reaping substantial benefits from the global data center expansion. Order intake for this segment surged by 85% in the last half-year period. Analysts at UBS have subsequently raised their price targets, citing bright prospects in power generation extending to 2028.

The company's core civil aerospace business continues its recovery trajectory. Engine flight hours have now surpassed pre-pandemic 2019 levels, securing stable revenue streams from long-term service agreements.

Geopolitics Fuels Investor Demand

The sharpening geopolitical landscape has triggered a broad rotation into European defense assets, serving as a primary catalyst for recent demand. Investor sentiment is reacting to heightened US military activity in Venezuela and President Trump's announced plan to drastically increase the US defense budget to $1.5 trillion by 2027. As a heavyweight constituent of the FTSE 100, Rolls-Royce is a direct beneficiary of this trend, moving in lockstep with sector peers like BAE Systems.

Valuation Concerns Prompt Caution

The remarkable share price appreciation has pushed valuation metrics into demanding territory. The forward price-to-earnings (P/E) ratio now stands above 36, far exceeding its ten-year average of approximately 15. Morningstar analysts also indicate the stock's fair value is significantly below current trading levels. In a move to bolster investor confidence, management initiated a new £200 million share buyback program on January 2, funded by the company's substantially increased free cash flow.

Market observers anticipate the next major catalyst on February 26, 2026, when Rolls-Royce is scheduled to release its full-year results. The leadership team has guided for an operating profit of up to £3.2 billion. Given the high expectations embedded in the valuation, any shortfall against these targets could introduce volatility. Looking further ahead, the development of small modular nuclear reactors (SMRs) stands as a potential additional growth lever for the medium term.

• Friday's Closing Price: €15.08
• Daily Change (Friday): +1.75%
• 7-Day Change: -5.75%
• 30-Day Change: +17.63%
• Year-to-Date (YTD) Change: -5.75%
• 12-Month Change: +117.17%
• 52-Week High: €16.00 (02/01/2026)
• Distance from 52-Week High: -5.75%
• 52-Week Low: €6.65 (14/01/2025)
• Distance from 52-Week Low: +126.70%
• 50-Day Moving Average: €13.20
• Distance from 50-Day MA: +14.24%
• 100-Day Moving Average: €13.19
• 200-Day Moving Average: €12.02
• Distance from 200-Day MA: +25.47%
• RSI (14-Day): 40.8
• Volatility (30-Day, annualized): 61.32%