From hero to zero: are Lloyds shares a ticking time-bomb after a 70% gain in 2025?

Lloyds (LSE: LLOY) shares have experienced a huge move higher this year, rising more than 70%. Currently, they’re on track for their best year since 2012.

Now, it’s fair to say that a 70%+ gain in less than a year for a FTSE 100 bank stock is very unusual (almost unheard of). This begs the question – are Lloyds shares a ticking time-bomb right now?

Are the shares overvalued?

Let’s start by looking at the valuation here. Are Lloyds shares overvalued after their huge gain in 2025?

Well currently, City analysts expect the bank to generate earnings per share (EPS) of 9.65p next year. So, at today’s share price we have a forward-looking price-to-earnings (P/E) ratio of about 10 (assuming the earnings forecast is accurate and it may not be).

Personally, I don’t see that valuation as overextended. Having said that, 10 is about the maximum that I feel is appropriate for Lloyds and I wouldn’t be surprised if the multiple fell back a little next year, to say, nine.

If it was to fall back to nine, investors would be looking at a 10% share price fall assuming the earnings forecast remains constant. Dividends could offset some of the losses though (the stock currently has a yield of about 3.8%).

Why would the valuation on the shares suddenly come down? Concerns about the UK economy, profit taking in bank stocks, an institutional rotation out of UK equities (after a rotation in this year), and general stock market weakness could be some potential drivers.

Can Lloyds deliver the goods in 2026?

The other variable we should think about is the 9.65p earnings forecast. Is this actually achievable?

I’m not sure.

One reason I’m not sure is that this year, Lloyds is only expected to deliver 7.33p in EPS. So, analysts are calling for a 32% jump in earnings next year.

Now, with interest rates at relatively high levels and the UK economy holding up ok, the backdrop does look quite healthy for banks at present. Lloyds is also engaged in cost-cutting and share buybacks, which should help to boost earnings per share.

But a 32% jump in EPS seems optimistic to me. I think there’s some risk of earnings forecasts falling next year, which could send the share price down.

I’ll point out that if the UK economy was to take a nasty turn for the worse, a drop in earnings forecasts would be highly likely. This scenario could lead to more bank loan defaults and lower profits.

My view on Lloyds

Putting this all together, I don’t see Lloyds as a ticking time-bomb. Right now, the stock isn’t massively overvalued.

That said, I do see the potential for some share price weakness next year after the huge gain this year. So, investors may want to consider other opportunities over Lloyds shares – there could be better performers in the UK market in 2026.

The post From hero to zero: are Lloyds shares a ticking time-bomb after a 70% gain in 2025? appeared first on The Motley Fool UK.

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Edward Sheldon has no positions in any shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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