£10,000 invested in Lloyds shares 3 months ago is now worth…
Lloyds (LSE:LLOY) shares are up 18% over the past three months. It’s quite phenomenal. Especially if you’ve watched the stock for some time and remember seeing the bank ‘trade sideways’ for years during the pandemic and the cost-of-living crisis.
In short, £10,000 invested three months ago would be worth £11,800 today. The company didn’t pay any dividends during the period. However, the forward yield sits around 3.6% and that equates to 0.9% per quarter — if it were paid quarterly (it’s not).
The big question is whether this momentum can continue as we move into 2026?
Compelling momentum
Momentum isnât just a buzzword â it reflects a pattern where rising share prices often attract further buying. As a stock moves higher, it draws attention from both retail and institutional investors, creating a self-reinforcing loop.
Traders following trend signals and funds tracking performance indexes may add to positions, while positive sentiment and news coverage encourage more buyers.
In Lloydsâ case, recent gains may highlight this effect. As the share price broke past long-standing ranges, more investors piled in, pushing it higher still. Momentum can persist beyond fundamentals.
And this is why many quantitive models will put significant emphasis on momentum. Often this is great because it allows us identify stocks that could reach fair value in a matter of months rather than years or decades. Sometimes it leads us into overbought stocks.
Valuation tells a different story
I certainly don’t believe Lloyds is overvalued, but the value proposition isn’t as strong as it was a few years ago.
On current forecasts, the shares trade on a price-to-earnings (P/E) ratio of roughly 15 times 2025 earnings, easing to about 13 times 2026 estimates as normalised earnings per share are expected to rise from 7.6p to 9.8p.
That implies earnings growth of close to 30% next year, which helps justify the rating, but it also means much of the recovery is already priced in.
Why is it priced in? Well banks are typically cyclical so they don’t tend to trade with large earnings multiples. For context, it was long ago that Lloyds was trading around five times forward earnings.
However, we’re certainly looking at a stronger company than we were.
Profitability has improved materially, with a 21.4% trailing operating margin and return on equity of around 9%, supported by higher interest rates.
The dividend yield of about 3.6%, covered close to two times, remains attractive, but it no longer looks exceptional when government bonds offer comparable income with far less risk.
In short, Lloyds appears fairly valued rather than obviously cheap.
What does this mean?
Sustained momentum is possible but by no means guaranteed. And the stock doesn’t really warrant a re-rating. A re-rating occurs when the market becomes willing to pay a higher valuation multiple for the same earnings, usually because perceptions of growth, risk, or quality have improved.
So, what could drive the stock higher? Well, more good news about the company or any good news about the UK economy.
I still believe it’s worth considering for the long run, but it’s not my favourite stock moving into 2026. There are many more appealing options for UK investors.
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James Fox has positions in Lloyds Banking Group Plc. 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.
