Rolls-Royce (LSE: RR.) has experienced remarkable growth over the past three years, with its shares rising approximately six-fold between early 2023 and the end of 2024. In 2025, the stock nearly doubled in value again, prompting questions about whether this upward trend can continue into 2026.
Investors are keen to understand the factors driving this impressive performance. A significant element of Rolls-Royce’s future potential lies in its involvement in the nuclear power sector. As global governments and large corporations increasingly explore nuclear energy as a source of clean and reliable power, Rolls-Royce stands to benefit from its extensive experience in this field. The company has been the exclusive provider of nuclear propulsion for the UK’s Royal Navy for over 60 years and aims to become a leader in Small Modular Reactors (SMRs). These compact nuclear reactors can be strategically located closer to energy grids, enhancing their utility.
In a recent discussion on the Joe Rogan Experience, Jensen Huang, CEO of Nvidia, mentioned the potential for numerous SMRs to power data centres within the next six to seven years. Huang indicated that energy constraints pose a significant challenge to the next phase of artificial intelligence development, suggesting that major tech firms may increasingly turn to SMRs for their energy needs.
While the prospects for Rolls-Royce in the nuclear sector are promising, competition in the SMR market is growing. The company faces challenges from other players in this evolving field, and there is no guarantee it will secure a dominant position.
Another factor contributing to a bullish outlook for Rolls-Royce is its growing engagement in the defence sector. Following a commitment from NATO countries to increase defence spending to 5% of GDP by 2035, up from 2%, Rolls-Royce is well-positioned to capitalize on this shift. The company offers a diverse range of defence products, including engines for fighter jets, helicopters, and naval vessels.
Despite these positive indicators, there is speculation that Rolls-Royce shares may experience a period of consolidation in 2026. After three consecutive years of substantial gains, a slowdown in momentum is not unexpected. Recently, the stock showed signs of faltering, with a decline observed in the fourth quarter of 2025. The company’s current valuation also raises concerns; the forward-looking price-to-earnings (P/E) ratio based on the 2026 earnings forecast is approximately 35, which is higher than that of Nvidia.
Such a consolidation phase could allow the stock to adjust to its valuation and provide a healthier environment for future growth.
For current shareholders, maintaining their holdings may be a wise decision given the long-term potential. However, for new investors considering fresh capital allocation, there may be more attractive opportunities in the market at present.
As the landscape for Rolls-Royce continues to evolve, the company remains active in developing its capabilities in both the nuclear and defence sectors. Investors will be watching closely to see how these developments affect the stock’s performance in the coming year.
