Here’s why strong investor sentiment could send the FTSE 100 soaring past 8,000 points

Upbeat FTSE 100 results have been coming in, and interest rates must surely fall this year. Investors could be smiling again in 2024.

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On 22 March, the FTSE 100 touched 7,961 points, just shy of 8,000. It briefly broke that level in early 2023, but just couldn’t hang on.

Can it climb through 8,000 points again soon, and then stay there? I’d say the chances of that are growing, for a number of reasons.

Cheery outlook

The key one is improving investor sentiment.

Russ Mould, investment director at investing firm AJ Bell, said that “everything has centred around central bank interest rate decisions and while the US and UK kept their rates level, it’s all about what could happen next, and confidence is growing that we’ll see rate cuts soon“.

He added that “risk appetite is increasing; corporates are slowly becoming more upbeat and people are making money“.

And that has to be good for stock markets, right?

Profits rising

Well, we need two things for that. As well as a positive outlook from investors, we need some sound fundamentals to back up the optimism. And I think that’s been improving for some time.

Forecasts suggest that total pre-tax profit from the FTSE 100 should break £250bn in 2024, and head even higher in 2025. Back in 2018, when the FTSE 100 was getting close to 8,000 points and before Covid put the boot in, that figure was below £200bn.

I’m also seeing a stream of results that show strong cash generation. We’re getting strong dividends, and new share buybacks.

Big dividend

As an example, let’s look at Phoenix Group Holdings (LSE: PHNX).

The stock had been on a huge forecast dividend yield of around 11%. So why weren’t investors buying the shares, pushing the share price up, and forcing the yield down?

I think the two key things we missing for this one. Sentiment had been glum. And we didn’t really have the evidence to support upbeat broker forecasts.

Top results

Then we got FY results, the firm announced a progressive dividend policy, and suddenly the yield looks more realistic. And the share price jumped on the day.

It’s still in a risky cyclical sector, and the insurance business faces new regulations. And Phoenix stock might even be fully valued. But it’s an example of the shift that I see happening.

The rest of 2024

Speculation is growing that we could see up to four interest rate cuts from the Bank of England by the end of the year. And we might even see the first as early as May.

If they happen, they’ll probably be a quarter of a point at a time. But that could bring the base rate down to 4.25%. And that should shift the attraction back towards stocks again.

I think we could still see a shaky first half this year. And all this talk of Footsie levels shouldn’t drive our investing choices anyway. For that, actual valuations and dividends from the companies themselves are all I care about.

But, just for fun, I’ll put my guess at the FTSE 100 reaching 8,500 points by the end of the year.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Aj Bell Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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