Why did the Rolls Royce share price drop today and will its rally continue?

Rolls Royce‘s share price fell by -8.56% on Monday as global equity markets wobbled over the prospect of a US recession and the ongoing uncertainty created by Donald Trump’s use of Tariffs. As disappointing as the fall in value of Rolls Royce shares is, we need to view the move in context.

For example, over the last 52 weeks the shares are up by +93.50% and over 24 months that figure rises to a gain of almost +394.0%.

So what was behind the Rolls Royce share price fall and was it anything more than a healthy pullback?

Rolls Royce is a manufacturer of jet engines used in aviation and defence. It competes on a global basis for new orders, as airlines and governments make procurement decisions about the engines that will best suit the airframes of the planes they are buying or own.

A contract win for Rolls Royce not only obtains the revenue, cash flow and income of the immediate order, it also secures an ongoing maintenance contract, that should continue for the lifetime of the engine. Which, if well managed, can extend to more than 40,000 hours of flying.

Flying hours in civil aviation are determined by the demands of major airlines, and on Monday the sector received something of a body blow, as US carrier Delta Airlines DAL US cut its Q1 2025 earnings guidance from 70 to 100 cents, down to just 30 to 50 cents.

The stock was hammered by -11.00% as a result. Stocks that are associated with the airline industry, like Rolls Royce, were hit as a consequence.

How about the rest of Rolls Royce’s businesses?

Global politics has experienced an upheaval in recent weeks as US President Donald Trump played hardball with Ukraine, over an end to the conflict with Russia. And with Nato and the EU, over the ongoing defence of the continent.

The upshot of which is that European powers can no longer be confident of American Support against an aggressor such as Russia.

Instead the UK Europe and must try to guarantee and pay for its own security to that end Keir Starmer has pledged to increase UK defence spending towards 3.0% of GDP, Germany has proposed boosting its defence spending by €500.0 billion over the next decade, whilst the EU wants to create a fund of €150.0 billion from which to grant loans to member states to aid defence spending.

That’s good news for Rolls Royce, which makes the jet engines that power modern fighter aircraft, battlefield power systems, gas turbines and diesel engines for use in the Navy, among other things.

It also builds and maintains reactors that power nuclear submarines.

Rolls Royce is a trusted contractor at the UK Ministry of Defence and it seems likely that it will benefit from increased spending on military equipment, maintenance and training.

Much of Rolls Royce’s operational fleet of jet engines operates outside of the USA and so the company should be largely insulated from any US tariffs that may be applied to the sector.

What about the future for the Rolls Royce share price?

City analysts rate Rolls Royce as a buy, however, the consensus target price according to marketbeat.com is 692.50p, which is below the current market price and Monday’s low as well.

We need to go back to the 27th February to find a point when the Rolls Royce share price dipped below here.

Rolls Royce’s market cap sits at around £63.00 billion so it’s not insignificant even in terms of the FTSE 100 index.

However, that means that the stock is likely to be included in basket and hedging trades on the FTSE 100 index, which can shift the Rolls Royce share price even if there is no new news in the stock itself.

The company will present at the forthcoming Global Industrials Conference hosted by Bank of America on March 20th, and across town at a similar function hosted by German brokers Berenberg on the same day.

So we can’t say that the firm isn’t trying to get its message across to the market.

At its full year 2024 earnings release, two weeks ago, the company confirmed a £1.0 bln share buyback for 2025 and announced that it had hit several medium-term, internal financial targets, two years ahead of schedule and had upgraded similar targets, for 2028.

Return on Capital and Operating Margins are now both running at 13.80% versus 5.10% and 4.90% respectively in 2022. Whilst operating margins in the civilian aerospace business have risen from 2.50% in 2022 to 16.60% today.

Change might not come as quickly at Rolls Royce in future, as it has in recent years, but the outlook is still positive for the business, which is becoming increasingly efficient.