Rolls Royce (LSE:RR) shares looked like they were heading towards 500p last month. For context, two years ago the share price was around 60p.

But now the share price is closer to 400p. What’s happening?

Problems at Airbus

Airbus is one of Rolls-Royce’s largest partners and customers, and engines manufactured in Great Britain are used in the European corporation’s wide-body jet aircraft.

However, in tardy June, Airbus lowered its delivery target for this year to 770 planes, down from 800. This means fewer Rolls-Royce engines will be used in Airbus planes this year, deepening the problems Boeing.

Airbus has since raised its outlook for the next two decades — led by wide-body jets. But near-term problems appear to be putting downward pressure on Rolls-Royce shares.

Rotation from emerging sectors

Recent market trends have shown a rotation away from the emerging technology sector. Although Rolls-Royce is not a technology company, its shares are trading at very high short-term multiples, suggesting a potential correlation. As investors shift away from technology, Rolls-Royce has also seen volatility, suggesting that stocks with high multiples in different sectors may be experiencing similar pressures.

Like the emerging technology and artificial intelligence sector, Rolls-Royce’s near-term valuation has spooked some investors. The company currently trades at 27.6 times forward earnings, a huge premium to FTSE100and to certain shares in the sectors in which it operates — civil aviation, defense and energy systems.

And like the emerging technology sector, Rolls-Royce is pricey based on its growth forecast. But major events like Trump’s return to the White House could change those expectations.

The price of perfection

As for the Trump presidency, which currently has an estimated 70% market share, his return to the White House could have a significant impact on defence spending, with defence accounting for 25% of Rolls-Royce’s turnover.

There are a few ways to assess the impact of a Trump presidency on defense spending. First, he wants to spend more on things like missile defense in the U.S. — which will not benefit Rolls — and also get European partners to spend more on defense.

However, Rolls is benefiting from commitments to long-term programmes such as AUKUS – for which it supplies nuclear propulsion – and Tempest – for which it produces jet engines. More spending on tanks, guns and ammunition is not a concern for the British engineering giant. One fear is that Trump could withdraw the US from AUKUS, although recent indications suggest he will not do so.

Similarly, analysts suggest that Trump’s inflationary policies could stall interest rate cuts. That, in turn, could mean less discretionary spending, less demand for travel and fewer flight hours for Rolls-Royce engines.

There are a ton of possible positive and negative catalysts. And with some analysts saying the stock is priced for perfection, that could be a problem.

Up or down?

There may be some short-term headwinds, but I think 500p is more likely than 400p. The all-important price-to-earnings growth (PEG) ratio is currently around 0.99 – very well – and my discounted cash flow calculations suggest fair value is around 850p.