The ‘dinosaur’ FTSE 100 index is starting to roar

The FTSE 100 index has often been derided in recent years, but UK large-cap stocks are beginning to show encouraging signs of life.

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The FTSE 100 index has hardly set the investing world on fire over the past five years. London’s blue-chip benchmark has advanced less than 15% since mid-2019. By contrast, the S&P 500 increased a little over 85% in the same timeframe.

Despite a miserable track record of underperformance against its international peers, I’m pleased to say the Footsie’s shown admirable signs of strength recently. It’s notched an impressive total of 11 all-time highs over the last month.

So is this the start of a long-overdue renaissance for the UK’s largest 100 shares?

Here’s my take.

The Jurassic Park of stock markets

The FTSE 100 is sometimes criticised as a ‘dinosaur’ index on the verge of extinction. That’s because it’s concentrated in traditional industries rather than more exciting growth areas.

Weighted by market-cap, the Footsie’s dominated by legacy sectors such as oil and gas, mining, utilities, and banking. Technology companies represent less than 1% of the index.

Remarkably, all Footsie constituents put together are worth less than individual US tech stocks like Apple and Microsoft.

Granted, there are some notable FTSE 100 success stories from recent years, including aerospace and defence engineer Rolls-Royce and homegrown accounting tech firm Sage Group.

However, too many FTSE 100 stalwarts have delivered a negative return over five years for my liking, including the likes of Diageo, Unilever, and Lloyds Bank.

UK shares still look cheap

Nonetheless, there are signs things are changing. The Footsie’s broad rally in 2024 has been encouraging to see.

What’s more, it might just be beginning. FTSE 100 shares are cheap compared to their US counterparts, which suggests they’re well-placed to deliver strong future returns.

The average price-to-earnings (P/E) ratios of the respective indexes suggest as much.

IndexP/E ratio
FTSE 10013.0
S&P 50024.7

From Diplodocus to Tyrannosaurus rex

Dinosaur fans will forgive me for extending the metaphor, but the FTSE 100 might be about to transform from a slow and heavy herbivore into a carnivore king.

Cheap valuations and strong momentum indicate there are good reasons for optimism, especially if these factors attract significant capital inflows.

Maybe the FTSE 100 doesn’t need the latest hot tech stocks to succeed in the 21st century after all.

Indeed, equipment rental business Ashtead Group‘s (LSE:AHT) a FTSE 100 stock worth considering and one that proves boring can be beautiful.

The company serves a range of clients in various industries. Its primary focus is on America’s construction and industrial sectors. The equipment it offers spans scaffolding, ladders, hand-held tools, and forklifts.

Ashtead Group should continue to benefit from a buoyant American economy and a positive outlook for the country’s construction sector.

Industrial policy remains a key focus for the Biden administration and spending on big projects, such as electric vehicle factories and semiconductor plants, is increasing. This acts as a strong tailwind for further growth in the Ashtead share price.

Granted, the company faces political risks from the upcoming presidential elections and hopes for Federal Reserve rate cuts are fading, which could hurt growth.

Nonetheless, I think Ashtead shares serve as a useful reminder that the FTSE 100 is far from a fossil graveyard. The age of the hungry dinosaurs could be back and I’m all for it.

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.

Charlie Carman has positions in Microsoft, Lloyds Banking Group Plc, Diageo Plc, Lloyds Banking Group Plc, and Rolls-Royce Plc. The Motley Fool UK has recommended Apple, Diageo Plc, Lloyds Banking Group Plc, Microsoft, Rolls-Royce Plc, Sage Group Plc, and Unilever 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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