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Lloyds (LSE:LLOY) shares are up 18% in the past three months. It’s really amazing. Especially if you’ve watched the stock for a long time and remember seeing the bank ‘trade on the sidelines’ for years during the pandemic and cost of living crisis.
In short, £10,000 invested three months ago would be worth £11,800 today. The company did not pay any dividends during this period. However, the forward yield remains around 3.6% and that equates to 0.9% per quarter – if it was paid quarterly (it isn’t).
The big question is whether this momentum can continue as we enter 2026?
A compelling impulse
Momentum is not just a buzzword – it shows a pattern where rising stock prices tend to attract more buying. As the stock climbs higher and higher, attracting the attention of both retail and institutional investors, a self-reinforcing loop is formed.
Traders following trend signals and financial tracking performance indicators may add to positions, while positive sentiment and news coverage encourage more buyers.
In the case of Lloyds, recent earnings may highlight this effect. As the stock price broke a long time ago, many investors piled in, pushing it harder. The momentum can persist past the basics.
And that’s why most measurement models will overemphasize momentum. This is usually good because it allows us to identify stocks that can reach fair value in a matter of months rather than years or decades. Sometimes it leads to overbought stocks.
Measurements tell a different story
I certainly don’t believe Lloyds is overvalued, but the value proposition is not as strong as it was a few years ago.
On current forecasts, the shares trade on a price-to-earnings (P/E) ratio of 15 times 2025 earnings, down to around 13 times 2026 estimates as ordinary earnings per share are expected to rise from 7.6p to 9.8p.
That means earnings growth of close to 30% next year, which helps justify the rating, but it also means that most of the acquisitions are already priced.
Why is it priced? Of course, banks are generally cyclical and therefore don’t tend to trade on large earnings multiples. For context, it was a long time ago when Lloyds was trading at around five times earnings.
However, we are definitely looking for a company that is stronger than us.
Profitability improved materially, with a 21.4% trailing margin and a return on equity of nearly 9%, supported by higher interest rates.
A dividend yield of around 3.6%, compounded at around two times, remains attractive, but it no longer looks different when government bonds offer relatively low risk income.
In short, Lloyds seems reasonably priced rather than obviously cheap.
What does this mean?
Continued momentum is possible but by no means guaranteed. And the stock doesn’t really encourage re-rating. Rebalancing occurs when the market is willing to pay twice as much for the same benefit, usually because perceptions of growth, risk, or quality have improved.
So, what could drive the stock higher? Well, some good news about the company and any good news about the UK economy.
I still believe it’s worth long-term consideration, but it’s not my favorite stock going into 2026. There are many attractive options for UK investors.
