Be prepared for a FTSE 100 correction, says the Bank of England

The Bank of England recently suggested that a stock market correction had become more likely. Our writer takes a closer look at the FTSE 100.

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The FTSE 100 hasn’t performed too badly in 2024. Just after the halfway point, the index is up 5.7% but down from highs reached earlier in the year.

Interestingly, while the FTSE 100 did reach record highs above 8,400 in May, many analysts have been keen to point out that, by several metrics, the index remains depressed.

In fact, in dollar and euro terms, the index didn’t reach an all-time high in 2024. By both these metrics, the FTSE 100 peaked in the 2000s when the pound was stronger.

Moreover, using inflation-adjusted metrics, among others, it’s clear that the index isn’t actually storming ahead.

With this is mind, it might come as something of a surprise to hear that the Bank of England (BoE) recently suggested that asset prices were looking at little stretched.

What did the Bank of England say?

In its financial stability report on 27 June, the BoE said that the prices of many assets, including shares and bonds, were elevated versus historical norms. The Bank added that some are continuing to rise.

“This suggests that investors in financial markets are continuing to expect the economy to recover and inflation to fall. They are placing less weight on risks, such as geopolitical developments or continued high inflation, that might cause weaker growth or interest rates to stay higher than expected.” 

It concluded: “These risks make it more likely that there could be a sharp correction in asset prices.”

The BoE added that a sharp correct in asset prices could make it more challenging for Britons to borrow.

So what does this mean? Well, personally, it’s not stopping me from investing. And while I’ve been increasingly focused on US investments over the past 12 months, I disagree with the premise that UK stocks, as a whole, are overvalued.

One under-appreciated FTSE 100 stock

While I often think there are better investment opportunities on the US market, one FTSE 100 stock I’m looking to buy more of is joint replacement specialist Smith & Nephew (LSE:SN.).

The stock underperformed during the pandemic when medical funds were directed to the treatment of Covid and away from elective surgeries.

Its disappointing trajectory was compounded by the release of highly-effective weight losses drugs like Wegovy. Some analysts suggest that thinner populations will mean less demand for hip replacements. While this remains a concern in my eyes, the company says they don’t expect any material impact.

Smith & Nephew’s earnings haven’t impressed investors since the pandemic, but the forecasts are very strong. The stock’s currently trading at 19.5 times forward earnings, and this is expected to fall to 14.7 times in 2025 and 12.5 times in 2026 as earnings improve.

While this may still appear expensive for some investors, I’d suggest it’s undervalued, considering the growth trajectory and sector.

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.

James Fox has positions in Smith & Nephew Plc. The Motley Fool UK has recommended Smith & Nephew 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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