Markets do not move on numbers alone. They are driven by mood, power, and the signals emanating from the world's biggest capitals. On Thursday, that reality was on full display as defence stocks surged across Europe and Rolls-Royce shares gained once more.
At the centre of the rally was a familiar mix: geopolitics, presidential rhetoric, and a well-known British industrial name that has learned the value of patience. Rolls-Royce shares strengthened in London after the company announced another round of share buybacks. The move coincided with US President Donald Trump's renewed calls for a higher US military budget, prompting investors to re-evaluate risk for 2026.
A Buyback Timed for Impact
Rolls-Royce disclosed on Thursday that it repurchased 434,889 shares on 7 January under its £200 million interim buyback programme, with the shares set to be cancelled. The transaction was carried out by UBS across the London Stock Exchange and CBOE CXE at prices ranging from 1,244 to 1,268 pence per share.
The latest purchase brings the total number of shares bought back since the programme began to 1,843,755, the company said. Shares firmed in London following the update, tracking gains across European defence-linked stocks.
The buyback is drawing particular attention because it falls into a critical window for the jet engine maker. Investors are increasingly focused on whether rising capital returns can be sustained alongside cash generation as Rolls-Royce approaches the release of its full-year financial report on 26 February.
The £200 million interim programme was announced in December after the company completed a £1 billion buyback in November. It is scheduled to run from 2 January through no later than 24 February, with broader decisions on capital returns for 2026 expected to be communicated alongside the earnings report.
For markets, the signal matters as much as the scale. The timing places capital discipline, balance-sheet strength and board confidence firmly in focus as investors reassess Rolls-Royce's valuation at near multi-year highs.
Defence Stocks Catch A Geopolitical Wind
The announcement is part of a broader trend across Europe. Trump's call for increased US military spending has sent defence stocks higher during Thursday's trading session. BAE Systems, for example, saw a rise of over 6%, while Chemring shares also gained. Several aerospace and defence firms, including Honeywell and Pratt & Whitney, reached new all-time highs as traders digested the implications of Trump's statements. Neil Wilson, an analyst at Saxo Bank, pointed out that geopolitics remains the primary driver of economic downturns and recoveries. He predicts that geopolitical tensions will dominate global markets throughout 2026 and have the most significant impact on the world economy.
Meanwhile, Morgan Stanley's analysts have adopted a more cautious stance, emphasising scale rather than immediate policy impacts when assessing contractor profitability. Nonetheless, increased government spending is expected to generate new long-term project opportunities for defence contractors, fostering a more optimistic outlook for the sector.
Rolls-Royce at the Crossroads of Risk
Rolls-Royce's unique position stems from its dual role: designing and supporting wide-body aircraft engines. Its substantial government contracts in defence provide a buffer but also expose the firm to fluctuations in the airline industry and geopolitical tensions—factors that can significantly influence its share price.
On Thursday, the stock closed approximately 0.8% higher than the previous day at £1,269.50 during afternoon trading, having reached a high of £1,286.00 earlier. These levels are viewed as psychologically significant. Whole-number prices often attract attention, leading to rapid buying or selling momentum that can both build and dissipate swiftly.
Retail Money Pours In
Retail investors have been closely monitoring the recent rally. Recent reports suggest that a £10,000 investment made one week ago would now be worth around £10,850—a move that fuels enthusiasm and high expectations for future gains. However, markets rarely move in straight lines. The current buyback programme runs from 2 January through at least 24 February, with broader details on capital return plans for 2026 expected during the full-year earnings release. Until then, speculation remains high.
Risks Beneath the Optimism
While buybacks signal strength and can serve as a positive forecast, they also carry warnings. Deteriorating cash conversion rates could undermine confidence. Slowing airline utilisation is likely to reduce service revenues from engines. Additionally, political divisions over defence spending threaten to diminish the significance of today's positive news.
Rolls-Royce has managed to rebuild investor confidence, but that confidence remains fragile at near-record high prices. The current valuation reflects high expectations, and any disappointment in February's results could amplify market reactions, both positively and negatively.
Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.
