The FTSE 100 is positioned for possible growth in 2025, but reaching the 9,000 milestone may take several years, despite a weaker pound sterling and promising dividend yields. In 2024, the index saw moderate growth, rising by 5.7%, mirroring the performance of the STOXX Europe 600 and outperforming France’s CAC 40, which fell by 2% amid political unrest. However, the German DAX 40, despite its own political challenges, far outpaced the FTSE 100, posting an impressive 20% gain, as did US large-cap stock indices.
This relative underperformance could present opportunities for UK equity investors as they move into 2025.
FTSE 100 Technical Outlook
Recent support near the key 8,000 level, observed in November and December, signals increased investor confidence in UK blue-chip stocks. As long as this support, along with the August low at 7,913, holds, the FTSE 100 remains in a long-term uptrend, bounded by a large medium-term sideways trading range. To achieve new all-time highs beyond the May 2024 peak of 8,478, the index must surpass the resistance zone between 8,364 and 8,418, marked by peaks from June to December 2024.
A breakthrough past this critical resistance and a move above the previous 8,478 record could bring the psychological 9,000 level into focus. However, such a move may not materialize in 2025 unless US markets continue their two-year streak of double-digit gains, which could prop up the FTSE 100.
Currency Tailwinds for UK Stocks
The UK stock market may benefit from a weaker pound. The British currency has dropped by 9% against the dollar since its September peak, and by 3.5% against both the euro and the Chinese renminbi. This decline could help boost FTSE 100 earnings, as the majority of companies in the index generate significant revenues from overseas markets.
A weaker pound enhances the competitiveness of UK exports and increases the value of foreign earnings when converted back to sterling. However, challenges remain, with limited growth prospects in China and economic contraction in Germany, key markets for UK businesses.
Attractive Dividend Outlook
Investing in the FTSE 100 remains appealing due to its strong dividend yields. Analysts predict £83.9 billion in dividends for 2025, with further growth expected in 2026. The dividend yield is forecasted at 3.8% for 2024 and 4.0% for 2025, based on ordinary payments alone. These yields are among the highest of major indices, trailing only Hong Kong’s Hang Seng at 4.2%.
With a Price-to-Earnings (P/E) ratio of 12.22 for 2024, the FTSE 100 is considered undervalued compared to its peers, particularly the Nasdaq 100, which has a much higher P/E ratio of 33.1. However, the FTSE 100’s low P/E ratio has not always been a reliable indicator of future performance. Over the past five years, the index has only gained around 7.5% (not adjusted for inflation), significantly lagging behind the STOXX 600, the French CAC 40’s 20% return, the Dow Jones Industrial Average’s 45% gain, and the DAX 40’s 50% rise.
UK Blue-Chip Share Buybacks
Despite the FTSE 100’s relatively slow growth, UK blue-chip companies are returning significant value to shareholders through share buybacks. Around £56.5 billion in buybacks are expected in 2024, reflecting corporate confidence in the UK stock market. This trend is anticipated to continue in 2025, with analysts predicting further shareholder returns as companies remain focused on robust cash generation and enhancing shareholder value.
While the specific amount of buybacks in 2025 remains uncertain, the strong cash flow of UK corporations and their commitment to returning value to shareholders suggest that share buybacks will remain a key feature of shareholder returns. Investors should keep an eye on company announcements and financial reports for further details as they become available.
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