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Rolls-Royce climbed 2.2 percent to a record 1,325.50p on Wednesday as defence stocks powered the FTSE 100 to 10,686 — its second consecutive all-time close. BAE Systems jumped nearly four percent after record orders, and falling inflation bolstered rate-cut expectations. Yet with Rolls-Royce trading at 36 times forward earnings and full-year results due February 26, the margin for disappointment is razor-thin.
A Record Built on Defence Spending and Falling Inflation
Rolls-Royce shares surged to an all-time high of 1,325.50p on Wednesday, surpassing the previous January peak of 1,305p and extending a rally that has delivered a 115 percent gain over the past twelve months. The aerospace giant was not alone: BAE Systems jumped nearly four percent to 2,103p after reporting record orders and an £83.6 billion backlog, while Babcock International added two percent. The synchronised advance across London’s defence heavyweights pushed the FTSE 100 up 130 points — 1.2 percent — to close at 10,686.18, its second consecutive record and the first time the index has traded above 10,650.
Two catalysts converged. First, reports that the UK government is considering accelerating its target to spend three percent of GDP on defence — well ahead of the original end-of-parliament timeline — sent defence contractors sharply higher. Second, the Office for National Statistics reported that UK consumer price inflation fell to 3.0 percent in January from 3.4 percent in December, the lowest reading since March 2025. Markets immediately strengthened bets on a Bank of England rate cut at the March or April meeting, lifting rate-sensitive sectors including housebuilders and real estate alongside the defence names.
The Valuation Catches Up
The question investors will need to answer before long is whether Rolls-Royce’s share price has outrun its fundamentals. The stock now trades at roughly 36 times estimated earnings — a valuation higher than most of its European defence and aerospace peers, including Rheinmetall, Leonardo, and Safran. The company’s full-year 2025 results, due February 26, are expected to show revenue of around £19.5 billion, up 12 percent from £17.8 billion the prior year, with operating profit in the range of £3.1 to £3.2 billion and free cash flow between £3.0 and £3.1 billion. Those are strong numbers, reflecting a genuine multi-year transformation from balance-sheet repair to shareholder returns. But much of it appears priced in. UBS recently hiked its target to 1,625p, citing data-centre power generation upside, while the analyst consensus sits around 1,272p — roughly five percent below the current price.
Three business lines are driving the bull case simultaneously: civil aerospace, where engine flying hours have recovered above pre-pandemic levels; defence, where NATO-aligned spending commitments are expanding contract pipelines; and power systems, where data-centre backup generation orders surged 85 percent year-on-year. The £200 million share buyback programme that commenced on January 2 and runs through February 24 has provided additional technical support. Yet the risk is that investors are paying a growth premium on all three pillars at once — and any shortfall in guidance on the 26th could trigger a rapid repricing.
The FTSE’s Unlikely Outperformance
The broader FTSE 100 story is equally striking. The index has gained more than seven percent in 2026 while the S&P 500 has slipped 0.5 percent — a reversal of the pattern that prevailed for most of the past decade. The explanation is partly structural: London’s old-economy DNA, heavy on miners, banks, energy, and defence, has become an advantage in a world where investors are growing nervous about AI capital expenditure and tech valuations. Companies like Glencore, GSK, and National Grid cannot be replicated by software, and their shares have each risen more than 20 percent this year. Tesco alone has surged 20 percent in under a month. The FTSE 100 generates roughly 80 percent of its revenues overseas, making it a global barometer that happens to trade at a persistent discount to Wall Street — a discount that is now, belatedly, narrowing.
Meanwhile in Warsaw: Record Sales and Europe’s Largest New Showroom
The Rolls-Royce name is breaking records in Poland too — though here the story belongs to Rolls-Royce Motor Cars, the BMW-owned luxury marque that is a completely separate entity from Rolls-Royce Holdings plc. The Warsaw dealership, operated by Auto Fus Group, closed 2025 with the highest sales in its history since opening in 2013, part of a record year for the UK, Europe, and Central Asia region. Globally the marque delivered 5,664 cars, with the Cullinan SUV the most ordered model, followed by the electric Spectre. Bespoke commissions in Poland hit an all-time high, with clients treating cars as collector projects involving 3D embroidery, 24-carat gold inlays, and multi-layered lacquer techniques.
Auto Fus Group has now broken ground on a new showroom complex at Ostrobramska 69–71 in Warsaw’s Praga Południe district — on the site of one of Poland’s first McDonald’s restaurants. The 7,700-square-metre building will house Rolls-Royce, McLaren, and Aston Martin under one roof, creating what the company calls a unique British luxury automotive hub. The Rolls-Royce showroom alone will occupy nearly 500 square metres, making it one of the largest in Europe. Construction is scheduled for completion by mid-2027. As Tomasz Fus, co-owner of Auto Fus Group, put it: the significant growth in demand, combined with evolving brand requirements, made the investment necessary to take the client experience to a level that matches the broader ambitions of a changing UK economy.
Taken together, the two Rolls-Royce stories — one on the London Stock Exchange, the other on a construction site in Praga — illustrate the same underlying dynamic. Capital is flowing toward tangible assets, physical infrastructure, and brands with pricing power. Whether that flow justifies a 36-times multiple on the aerospace side will become clearer on February 26.
