Image source: Rolls-Royce Holdings plc
Rolls-Royce (LSE:RR.) shares are showing no signs of cooling as 2026 gets into full swing. Up 7% since 1 January, the FTSE 100 stock’s now up a staggering 122% over the last 12 months.
Can the share price continue its breakneck momentum? I’m not so sure. In fact, I think the engineer might now be in danger of a correction. Here are four reasons why.
1. Supply chains
Thanks to strong travel demand, Rolls-Royce has seen revenues from the civil aviation industry boom in recent years. With more planes in the air, and large-engine hours rising sharply, its plane servicing operations have thrived. Engine sales have risen too, as airlines work to update their fleets.
There’s no guarantee that this critical end market will remain robust in 2026, as economic and geopolitical uncertainty grows. But let’s say that demand does indeed remain strong. Will Rolls be in a position to capitalise on this as supply chain issues linger?
The company warned in November of “continued supply chain challenges.” Underlining the ongoing industry threat, Airbus last week predicted issues with another major engine supplier Pratt & Whitney would last “for the foreseeable future.”
Signs of growing strain — and any consequent impact on Rolls’ operations and cost base — could have significant ramifications for its share price.
2. Competition
Rolls-Royce is a heavyweight across a variety of engineering markets. The problem is that it competes with other industry bruisers, leaving it exposed to competitive threats that could derail earnings growth.
Take the widebody market, where the FTSE firm locks horns with GE Aerospace. Its US rival is a fierce competitor in terms of product reliability and lifecycle costs, and the pressure is growing as GE steadily develops new technology (like its Open Fan engine).
Don’t get me wrong: Rolls is more than holding its own in the industry. But things can change quickly. If rivals start winning major contracts at the firm’s expense, it could undermine investor confidence in its growth prospects.
3. Dollar weakness
A weakening US dollar is on paper bad news for Rolls-Royce. When companies with Stateside operations like this convert profits there into pounds, they look smaller on the profit and loss account when the greenback drops.
In practice, this isn’t a problem for the engineer right now. With an enormous currency hedge book, the business has ‘locked in’ a guaranteed exchange rate for years into the future.
But this doesn’t cover risk beyond the short-to-medium term. And the problem for Rolls is that the dollar’s declining sharply (down 9% over the past 12 months) as worries over political conditions in the US grow, the Federal Reserve cuts interest rates, and investors diversify away from the currency.
If the greenback keeps dropping, fears over foreign exchange pressures later on will naturally mount, potentially impacting the share price.
4. Valuation
Yet despite these dangers, Rolls-Royce shares continue to command an enormous premium. At £12.85 per share, they trade on a forward price-to-earnings (P/E) ratio of 38.9 times.
That’s miles above the 10-year average of 15. Forget for a moment how this could limit future share price growth. At these levels, the stock could fall off a cliff on even the slightest sign of trading weakness.
Rolls shares might be an attractive choice for more risk tolerant investors. However, I won’t be buying them for my own portfolio.
