Since the beginning of the year, the FTSE 100, the UK’s leading blue-chip index has been on a tear.
The index has jumped from 6,728 on 1 January 2019 to 7,351 at the time of writing, that’s a total gain of 9.3% in just a few months.
I think this could be just the start of something much more significant. In fact, I reckon there’s a strong chance that the index will hit 8,000 at some point in 2019 and today I’m going to explain my reasoning behind this target.
Strong growth
At the end of last year, stock markets around the world sold off on speculation that global economic growth was starting to slow and some analysts believed a recession could emerge in 2019.
Analysts were also predicting a so-called earnings recession in the first quarter of 2019. Wall Street analysts were predicting shrinking profits for companies in the S&P 500, which, they believed, would be a catalyst for a further sell-off.
The good news is, this just hasn’t happened. The numbers show around 80% of companies reporting that results for the first quarter of 2019 have matched or beaten expectations.
Usually, I don’t tend to pay too much attention to quarterly earnings results, but I think these figures are exciting because they show that the global economy remains in rude health, and analysts’ speculation there could be a recession in 2019 was just that, speculation.
These numbers are particularly crucial for the FTSE 100. As a global index with more than 70% of profits coming from outside the UK, the FTSE 100 is highly sensitive to movements in the global economy. With data showing the global economy is still growing at a healthy pace, this is good news for FTSE 100 constituents, and, as a result, the index itself.
Surging profits
As well as these global economic tailwinds, which should support help push the index higher over the next 12 months, I believe the FTSE 100’s discount valuation will also attract investors.
According to research from AJ Bell, this year the FTSE 100 is forecast to generate an all-time pre-tax profit of £223bn, up from the previous peak of £202bn eight years ago. Based on these numbers, pre-tax profit for the index’s constituents are up 13% year-on-year, and it is trading at a price to earnings ratio of just 12.5.
Last year, the index peaked at 7,877 and with profits up 12% year-on-year, I do not think it is unreasonable to say that it could surpass this level in 2019 as investors realise the opportunity here.
A 12% gain would take the FTSE 100 to nearly 9,000. This lofty target might be a bit unrealistic in the near term, but I think it is entirely possible that the index could hit 9,000 in the next three or four years as the global economy, and constituent profits continue to expand.
The bottom line
So, that’s why I believe the FTSE 100 could hit 8,000 this year. A combination of improving investor sentiment and rising profits could work together to push the index to new highs.
