- AJ Bell FTSE 100 forecast for the end of 2025: 9,000
- Inflation, monetary policy and commodity prices are key variables
- Dividends, buybacks and takeovers should supplement any capital returns
- Prevailing gloom means UK equities look cheap on an earnings and yield basis
“After a steady advance of 7% in 2024, the FTSE 100 stands a fraction below the all-time high set in May, and that capital gain comes with dividends, share buybacks and cash inflows from takeovers on top, to confound the prevailing bearish tone of commentary on UK equities, at least to some degree,” says AJ Bell investment director Russ Mould. “Total returns from the UK stock market in 2024 handily beat cash, bonds and inflation, but the poor comparisons with the USA remain the stick with which the FTSE 100 is constantly beaten. Whether the NASDAQ and S&P 500 will finally run out of puff in 2025 remains a matter of debate, but value- and income-seeking contrarians could be forgiven for giving the UK a closer look, given consensus forecasts for earnings and dividend growth.
“The UK stock market did lag that of the USA and many of its global peers once more in 2024, even as the Bank of England began to cut interest rates, the general election delivered a decisive result which could end the merry-go-round of incumbents in both number 10 and 11 Downing Street and nearly 50 UK-listed firms acceded to takeover bids from home or abroad.
Source: LSEG Refinitiv data. *From 31 December 2023 to 13 December 2024, in local currency.
“No-one seems interested in the UK equity market, other than to bash it for failing to attract more new flotations and the defection of some companies to other exchanges (even if many global rivals suffered a similar dearth of new joiners in 2024).
“Such knocking copy persists, even though analysts think the FTSE 100’s aggregate pre-tax income in 2025 will exceed 2018’s pre-Covid peak by £78 billion, or some 46%, and that aggregate net, post-tax earnings will be £41 billion, or 31% higher.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
“The boardrooms of the FTSE 100’s members do not seem to be lacking in confidence in the future, or their financial performance, even if their share prices seem far from convinced.
“The FTSE 100’s constituents have announced a near-record £56.5 billion in share buybacks in 2024, to add to analysts’ forecasts of £78.5 billion in regular dividend payments and £3.3 billion in special dividends. Combined, that trio makes for a ‘cash yield’ on the FTSE 100 of 6.4% for 2024, with the prospect of a 6.5% increase in ordinary dividend payments in 2025, if analysts’ consensus forecasts are to be believed.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
“Even if there is no guarantee of a repeat of the buybacks bonanza in 2025, dividend cover is nicely above two times for next year, based on consensus analysts’ forecasts for earnings and dividends. Estimates of a 3.9% dividend yield combined with a forward price/earnings ratio of barely 12 times for next year may catch the eye of value-seekers, especially when net income is currently projected to advance at a mid-teens percentage rate in the coming year.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
“Any trader or investor will tell you that mood follows price and UK share prices have, admittedly, not done much in the second half of 2024 based on the headline indices, and they certainly have not kept pace with the meteoric rise of US equities.
“As a result, UK stocks feel unloved and unloved can mean cheap. And buying cheap, rather than blindly taking risk, is usually the best possible way of getting good long-term returns. As the old saying goes, ‘you can have good news and cheap stocks, just not both at the same time.’
“All other things being equal, even an 8% advance in the FTSE 100 to 9,000 would leave the index on a PE of 13.3 and a yield of 3.6%, neither of which looks demanding.
“It would also leave the UK’s premier index with an aggregate stock market capitalisation of around £2.4 trillion, or $3 trillion – less than that of Apple, where the analysts’ consensus forecast net income for 2025 is £87 billion. This equates to barely half of the consensus estimate for the FTSE 100, which is expected to offer faster profit growth and a higher dividend and total yield for good measure, in cash and percentage terms.
“Even if investors, institutional or otherwise, remain wary of UK stocks, corporate and financial buyers seem to think there is an opportunity to be had, judging by the number of takeover offers received by UK-listed firms, including five FTSE 100 firms. Darktrace, DS Smith and Hargreaves Lansdown are the subject of successful offers which will conclude in 2025, while Rightmove and Anglo American managed to fend off their predators’ advances.
“Political uncertainty should now be receding in the UK, given the Labour government’s thumping majority, and this offers a favourable comparison with Europe, where coalition administrations now seem to be falling over at a pace to match that of the Conservative Party’s enthusiastic sacking of its leaders, prime ministers and chancellors in recent years. The jury may still be out on the new chancellor’s first Budget, but some credit should be given for at least acknowledging the fiscal deficit which faces the country, a topic barely mentioned during the US election campaign and one that is now coming home to roost in France.
“The biggest challenge for UK equities could be if 2025 sees any divergence from the expected macroeconomic path of cooling inflation, modest economic growth and falling interest rates (although the same danger faces the US and European stock markets, which come on higher valuation multiples, according to consensus analysts’ forecasts).
“A recession would be the biggest outlier as an outcome, but the discussion seems to be gently switching to whether UK interest rates could be higher for longer thanks to sticky inflation.
“The two-year gilt yield offers a good litmus test here. At the time of writing, it stands at 4.29%, a figure which suggests either very modest rate cuts in 2025, or rate increases in 2026, or both.
“That could place a premium on reliable sources of equity income, an area where the UK stock market is still able to argue its case.
“And if we do get an alternative outcome – such as stagflation, inflation and stickier-than-expected interest rates – the UK equity market’s charms may become more apparent. This could indeed be the lesson from 2022 when the FTSE 100 hung in there and growth stocks in the USA took a pounding.
“There may even be potential for upside to earnings estimates, especially as the slant of earnings towards oils, miners and banks means the FTSE 100 may be one of the indices that is better suited to an inflationary or stagflationary out-turn.
Source: Marketscreener, consensus analysts’ forecasts
“That would contrast with markets like the USA, which is crammed with tech, social media, internet and biotech stocks that offer the prospect of long-term earnings growth from the starting point of high valuation multiples. The package remains one of jam tomorrow at high prices, a combination which proved ill-suited to 2022’s environment – an environment which investors believe to be the aberration rather than the new normal.
“Equities’ rally in 2023 and 2024 has undone much of commodities’ relative outperformance in 2021 and 2022, as investors have kept faith in central banks and their ability to defeat inflation, stave off a recession and preserve financial market stability.
“But should inflation – or stagflation – prevail, commodities and ‘real’ assets may yet exert a stronger pull than ‘paper’ ones even if commodities overall have lagged equities for the last two years, as weakness in oil and industrial metals has offset strength in gold, silver and certain crops, such as coffee and cocoa.”
Source: LSEG Refinitiv data
