The time is ripe for the FTSE 100 to outperform the S&P 500

After back-to-back year gains of more than 20% for the S&P 500, Andrew Mackie believes that better value is now to be found in the FTSE 100.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Since the launch of ChatGPT at the end of 2022, the S&P 500 has been on a tear. With every other stock market, including the FTSE 100, left behind, Wall Street analysts expect 2025 to be another stellar year for the US. I, though, believe 2025 is likely to be a much tougher year for US index investors.

Concentration of stocks

One of the biggest risks for the S&P 500 in 2025 and beyond is extreme concentration. A few years ago, it was the FAANG stocks that were the darlings of the market. Today, it’s been rebranded as the Magnificent 7.

Call it what you like, but a stock market that is being propped up by just a handful of stocks makes no sense to me.

On top of the concentration risk, is the fact that virtually everyone is on one side of the boat. Not only US investors have piled into the S&P 500 but so has the rest of the world.

Smart money is out

When individuals like Warren Buffett and Stan Druckenmiller start paring back or selling out completely from their mega-cap holdings, I simply can’t ignore that fact.

Buffett once famously described Apple as “probably the best business I know in the world”. But even a great company can become ridiculously overvalued.

Today, the earnings yield (the inverse of the price-to-earnings ratio) of the S&P 500 is lower than a risk-free 10-year treasury bond. The last time this happened was back in 2000, just before the dot.com bubble popped. To me, this fact pretty much sums up the level of complacency that is out there today.

FTSE 100 comeback

If the gloss starts to come off the Magnificent 7 in 2025, I don’t believe the index will go sideways. That is certainly not what happened in 2022.

I don’t doubt that if the S&P 500 falters that the contagion would likely initially spread to the FTSE 100. But I don’t think it will last.

If 2022 taught me anything it is that once investors have clambered for the exit, they then start hunting for cheap, safer plays. Packed with blue-chip companies at ridiculously low P/E multiples, many dishing out inflation-busting dividend yields, the FTSE 100 will be a natural choice.

One sector that is doing really well at the moment is financial services. The Barclays share price has doubled over the past 12 months. Despite this, it trades at forward P/E of just seven.

Insurance businesses also look cheap to me. Aviva’s 6.8% dividend yield, supported by long-term structural growth trends, make it a compelling investment to consider.

Then there are the oil stocks. The BP and Shell share prices have been weighed down by weak oil and gas prices throughout 2024. But this is beginning to reverse. And with a US president who supports the industry, I believe the upward trend will continue.

I don’t want to forget about the miners. As demand for electricity soars from the likes of data centres, EVs, and heat pumps, huge investments in grid infrastructure will be needed. Glencore and Anglo American have some of the best large-scale copper mines across the globe. Both of these stocks’ valuations don’t reflect their intrinsic value, in my opinion.

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.

Andrew Mackie has positions in Anglo American, Aviva Plc, Barclays, Bp P.l.c., Glencore and Shell Plc. The Motley Fool UK has recommended Apple and Barclays 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.

More on Investing Articles

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

Time to buy Nvidia shares before fresh all-time highs?

Nvidia shares began 2025 at an all-time high before a big drop in the last week or two. Our writer…

Read more »

Investing Articles

A top FTSE 100 share to consider for a Stocks and Shares ISA starter portfolio!

While not without risk, a lump sum in this FTSE 100 trust could prove a great way for Stocks and…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

I asked ChatGPT to name the best 5 UK shares to build wealth over 50 – and here they are!

Harvey Jones is looking to build a balanced portfolio of UK shares to fund his final years, and asked ChatGPT…

Read more »

Investing Articles

£10k invested in Scottish Mortgage shares after the DeepSeek crash is now worth…

Harvey Jones thought his Scottish Mortgage shares were heading for a bumpy ride when DeepSeek emerged last month. Then he…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

1 ex-penny stock up nearly 400% in my Stocks and Shares ISA! 

This writer is starting to take notice of a small-cap stock that is 'up' significantly in his ISA portfolio over…

Read more »

Investing Articles

The FTSE 100 index hits new highs! But will Legal & General shares outperform it in 2025?

Legal & General's share price has rocketed almost 8% so far in 2025. Can it continue to outstrip the surging…

Read more »

Investing Articles

Up another 8% in a week! So what’s stopping me from buying IAG shares? 

Harvey Jones is desperate to add high-flying IAG shares to his portfolio before they climb even higher but there's a…

Read more »

Happy couple showing relief at news
Investing Articles

The Bank of England’s slashed its growth forecast but the FTSE 100 doesn’t seem to care!

On the day the UK’s central bank halved its forecast for growth in 2025, the FTSE 100 reached a record…

Read more »