The FTSE 100 has performed relatively well in 2024. Over nine months, it rose from 7,733 to 8,237 – a gain of 6.5%.
Here, I’m going to discuss where I think the index could be in half a decade’s time. Let’s get into it.
This could go badly wrong
Let me start by saying that forecasting future index levels is notoriously difficult. So, my predictions for the Footsie could turn out to be horribly wrong (and quite embarrassing).
Making forecasts can still be a useful exercise, however. Because they help me focus on achieving the best investment returns possible.
The FTSE 100’s historical returns
Now, to generate a forecast for the FTSE 100, I looked at the index’s past performance over the last 20 calendar years (2004 to 2023). I wanted to see how it has performed over the long term.
What I found was that over the last two decades, it has delivered total returns of approximately 6.3% per year. That’s gains plus dividends.
The thing is, we’ve had some pretty monumental crises in that period. There was the Global Financial Crisis of 2008/09, which sent the FTSE 100 down nearly 30% in 2008. Then there was the coronavirus pandemic of 2020, which sent the index into another major tailspin. Both of these events affected long-term returns significantly.
My forecast
Looking ahead, I’m going to assume that we don’t see anything as crazy as these two events over the next five years. So, returns from the index could be a little higher than 6.3% per year.
I’m going to forecast total returns of 7% annually. And I’m going to break that up into 3.7% index gains and 3.3% dividends per year (that’s roughly the yield today).
Taking that 3.7% gain per year and applying it to today’s level of 8,237, we get a level of 9,878 in five years’ time. In other words, the Footsie could be close to 10,000 by then.
Higher returns from individual stocks?
I’ll point out that I expect many stocks within the index to perform much better than this over the next five years. There are likely to be plenty of stocks that return 10%, 20%, or even more per year over this period.
One stock I’m excited about is Smith & Nephew (LSE: SN.). It’s a healthcare company that specialises in joint replacement technology.
Like a lot of healthcare companies, this one experienced some setbacks during the pandemic. With many hip and knee surgeries postponed, its growth slowed.
The outlook is now improving though. This year, the group expects underlying revenue growth of 5-6%, which is healthy. Meanwhile, City analysts expect earnings per share of 11% this year and 19% next.
Given that the price-to-earnings — or P/E ratio — is just 14 right now, I see scope for an upward valuation rerating. Add in dividends (the yield is about 2.4% currently), and total returns in the years ahead could be attractive as earnings climb.
Of course, buying individual stocks is riskier than investing in a FTSE 100 index fund. That’s because every company has its own risks.
Here, risks include competition from rivals and new disruptive medical technologies.
All things considered though, I think this stock has the potential to beat the index. That’s why I own it in my own portfolio.
