Close to decade highs, how much further can the Tesco share price rally?

The Tesco (LSE:TSCO) share price has been on a remarkable run for the past few years. Even in 2025 when some thought it looked overvalued, it kept pushing higher, gaining 22% last year. With a recent festive trading update showing even more reason to be optimistic, the question now turns to how much further it could realistically keep going.

Dominating the market

Let’s focus, to begin with, on the recent drivers supporting the price. In my view, part of it stems from gains in market share. Data showed it reached around 28.7% by the end of 2025 (its highest level since 2015) as it outpaced rivals in a competitive environment. This speaks to the strong customer loyalty the company has built up, especially with measures such as the Clubcard strategy.

If we fast-forward to last week, the trading update for the six weeks to the start of January showed that group like-for-like sales rose by 2.4%. The CEO commented that one of the drivers was that “we launched 340 new and improved own-brand Christmas products including 180 in Finest, which once again delivered double-digit sales growth.“

It’s also worth mentioning the impact of AI. Even though some might think this isn’t relevant to a supermarket, they’d be surprised! The report spoke of “AI-powered scheduling tools developed by our technology and logistics teams” helping to improve the efficiency for online delivery slots.

The direction from here

The momentum Tesco has right now makes me think the rally is well justified. The increase in the share price has kept pace with the earnings. This is indicated by the price-to-earnings (P/E) ratio being at 16.33. This is just below the FTSE 100 average, meaning that it’s not overvalued.

The 2025 earnings per share is 30p, an increase of 19.5% from the previous year. I think we could see earnings grow by another 10% this year, assuming the company maintains its high market share. If the P/E ratio stays the same, this would indicate another 10% move higher in the share price.

The strong performance over Christmas leads me to believe that UK consumers are in a better place financially than I previously thought. This should mean Tesco can keep doing well with its premium ranges this year. Yet at the same time, if the economy takes a downturn and people become more price-conscious, Tesco has a diversified range of cheaper options.

Another point that could support the stock is the divdiend. Tesco’s ability to convert strong sales and operating performance into free cash flow supports a higher dividend over time. Evidence of this can be seen from the increase in the dividend per share over the past couple of years. The yield at the moment is 3.13%, above the FTSE 100 average. If this increases in the coming months, it could attract more income investors, boosting the stock further.

One risk is that the UK grocery sector is fiercely competitive. Price wars with other supermarkets are common, with aggressive promotional activity potentially hurting Tesco’s margins.

Even with this, I think the company is well placed and could be considered by investors.

The post Close to decade highs, how much further can the Tesco share price rally? appeared first on The Motley Fool UK.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco 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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