2026 is proving to be more challenging for Rolls-Royce (LSE:RR) shares than the past three years. The stock is down almost 20% since August, leaving it not too far ahead of the FTSE 100‘s year-to-date performance.
On 12 November though, there’s a potential catalyst that may decide whether Rolls-Royce finishes the year on a high or not.
What’s going on?
I’m talking about a third-quarter (Q3) trading update scheduled for next week. In this, the company will issue trading commentary for each division, including large engine flying hours, and any other relevant details.
One thing Rolls-Royce will surely trumpet is the recent deal struck with the government to develop an engine to potentially return to the narrow body jet market. Taxpayers will part-fund this 10-year £2.5bn programme, which will support thousands of jobs.
The single biggest opportunity in aerospace over the next 50 years is to secure a UK engine position on next generation narrow body programmes.
UK Department for Business and Trade. Industrial Strategy: Advanced Manufacturing Sector Plan.
Crucially, management will tell us whether it’s confident in meeting full-year 2026 guidance. In July, this was upgraded to operating profit of £4.7bn-£4.9bn (from £4bn-£4.2bn) and free cash flow of £3.8bn-£4.bn (from £3.6bn-£3.8bn).
However, one concern is that surging fuel prices are putting huge cost pressure on airlines. If there’s a cyclical downturn emerging in the aviation industry, that’s obviously not ideal for Rolls-Royce’s core unit.
That said, it’s worth noting that US rival GE Aerospace reported solid Q3 results last month. Despite the challenging operating environment, the engine maker beat Wall Street’s expectations and even raised its full-year guidance.
As a Rolls-Royce shareholder, I’m hoping this performance from GE is a good omen for the forthcoming update.
AI trade wobble
Another thing that has probably hit the share price recently is renewed fear about an AI bubble. Shares in Alphabet, Nvidia and other technology giants have pulled back sharply in the past month as investors fret about enormous AI capital expenditure.
As a reminder, Rolls-Royce’s Power Systems unit is growing on the back of the AI boom. Historically, data centres used diesel generators as emergency back-up. Now though, AI data centres require so much electricity that grids cannot connect them fast enough, forcing operators to turn to gas generator sets for primary on-site power.
As such, CEO Tufan Erginbilgiç sees gas engines reaching 15%–20% of Power Systems by 2030, from less than 10% today. And this should provide an opportunity to create new service revenue streams from AI data centres.
How pricey is the stock?
After its recent stumble, the stock’s forward P/E ratio is now in the mid-20s. While not cheap compared to the FTSE 100, the valuation looks more attractive than it has done for a while.
Once investors refocus on the opportunities ahead, I think the stock will bounce back. After all, AI is just one part of the growth story. There’s also rising global defence spend and the huge potential of small modular reactors (SMRs) and advanced modular reactors (AMRs). The narrow body jet opportunity adds further potential optionality.
Nothing much has changed for me. Rolls-Royce is exposed to some really attractive structural growth markets. As such, I think the stock’s worth considering before 12 November.
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Ben McPoland owns shares in Nvidia and Rolls-Royce.
