Will the FTSE 100 reach 9,000 next year? That record number won’t be easy – it’s a 19% upswing. But stranger things have happened, so let’s look at how the index might surprise us all in 2024.
Interest rates might have the biggest impact. With inflation fading, some have predicted five cuts to interest rates next year. Cheaper rates mean cheaper borrowing and more consumer spending. All of which could help the Footsie push higher.
If investor sentiment improves, a double-digit return isn’t much of a stretch. Since the FTSE 100’s inception in 1984, the index has returned 10% or more about half the time. Several of those years returned above 19% too.
The FTSE 100 annual returns in the above chart show an interesting trend. The biggest increases often follow a big decrease. This might seem obvious. After all, markets are volatile and sometimes stocks are cheaper than their true value.
Well, the FTSE 100 looks astonishingly cheap at present. The index has an average price-to-earnings ratio of 11. Just 11 years of earnings to match the entire market capitalisation? That sounds low all on its own, but let’s put it into context.
Cheap or pricey
The S&P 500 P/E ratio is around 25, comfortably more than double. Relative to its price, the average Footsie company is making over double the profit of a US counterpart. This chasm in valuations is why some of our best and brightest firms like ARM Holdings are listing across the pond.
Okay, US stocks are expensive, but that’s been true for a while. Perhaps the US isn’t a fair comparison. What about other countries?
Well, the German DAX average P/E is around 15, the Japanese Nikkei is around 16, and the French CAC 40 is around 34. Wherever you look, the story is the same. Britain is home to unusually depressed valuations.
Stocks haven’t always been this cheap either. The CAPE (cyclically adjusted price-to-earnings ratio) can help us compare valuations to past ones. The CAPE is an inflation-adjusted 10-year P/E ratio.
The FTSE 100 CAPE is around 19 as I write. In other words, comparing current prices to the last 10 years, stocks look very, very cheap.
No guarantees
Cheap stocks do often precede a rise in share prices, but it’s not guaranteed. Likewise, the Bank of England has made no promises about reducing rates in the near future. There are several big ifs here.
Perhaps the biggest obstacle is that 9,000 is a long way away. A 19% rise over the next year has only happened a few times. The FTSE 100 is going to need a monster 2024.
No one knows whether that will happen or not, but I’ll be crossing my fingers.
