The relationship between Rolls-Royce Holdings (LSE: RR.) shares and City analysts has gone hand-in-hand over the past few years.

Rolls posts a strong set of results, investors push the price up further, analysts lift their targets even higher. And repeat.

After five years, we see Rolls-Royce shares up a staggering 1,110%. And analysts have now lifted their average target price to 1,413p. That’s close to another 10% gain.

Has nothing changed?

I do, however, think there’s been a significant change in investor sentiment in 2026. Previously, I believe we’d been seeing a lot of investors buying simply due to share price momentum. It keeps going up, and they can’t afford to miss out — that kind of thing.

But now I think there’s been a shift towards investing based more on valuation. The massive five-year surge looks like it might finally have topped out — Rolls-Royce shares have been up and down in 2026, but have gone hardly anywhere overall.

The valuation the market might be settling on means a price-to-earnings (P/E) ratio of 35. That’s the forecast for the full year — and it could come down to 25 by 2028.

What comes next?

With our diversified portfolio of three high performing businesses, a net cash balance sheet, and a best-in-class total cash cost to gross margin ratio, we are creating a more resilient and agile Rolls-Royce that is better equipped to respond to changes in the external environment.

— CEO Tufan Erginbilgiç in AGM update, 30 April

The CEO went on to say “Good progress on our transformation, and the actions we are taking, gives us further confidence in our guidance of £4.0bn-£4.2bn of underlying operating profit and £3.6bn-£3.8bn of free cash flow for 2026“, adding, “We remain strongly positioned to deliver our mid-term targets, with substantial growth beyond the mid-term from both our existing and new businesses“.

That kind of talk makes it sound like those optimistic analysts might be bang on the money.

How do we get there?

But reference to “existing and new businesses” catches in my mind.

Rolls-Royce still gets the biggest portion of its revenue from the aero engine business — both civil and military. The defence business, though, provides only about 25% of total revenues. There’s a defence boost from the world’s current conflicts, for sure. But I think we should avoid putting too much store by that.

As for new businesses, that has to be predominantly energy, and the new small modular reactors (SMRs). They’re going in at the new power station on Anglesey, which is a big plus.

But there’s a fair bit of hype behind them too. Many see them as ideal for powering AI demand — perfect for hyper-scale data centres, perhaps.

What’s in between

My big unknown is how Rolls-Royce’s valuation might look in the transition. If the resurgence in aviation revenue flattens out before much in the way of SMR revenue comes in… what then?

With that uncertainty, I don’t see enough safety margin in the valuation of Rolls-Royce shares today for me to invest. There is still potential here, I’m convinced. But growth investors might do well to consider widening their horizons a bit.

Should you invest £5,000 in Rolls-Royce Plc right now?

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Alan Oscroft does not hold any positions in the companies mentioned.