Over the past 15 years, how many times could one say that the FTSE 100 had outperformed the S&P 500? Probably as many times as the weather is hotter in the UK than in Ibiza. Yet year to date, shares in the blue-chip index are up 5%, while the US index is down 5%. This is no blip to my mind but could be the beginning of a golden era for UK shares.
Concentration risk
I’m sure you’ve heard it all before: the FTSE 100 is packed with dinosaurs, relics of the old economy like banks, miners and energy stocks. The S&P 500, on the other hand, is full of dynamic entrepreneurial, tech businesses that permeate every aspect of our lives.
The problem for the major US index, however, is that its fate is inextricably tied to a handful of stocks. Today, the top 10 holdings account for 35% of the entire index.
What’s more alarming though is the weighting US stocks have on the international stage. Some 73% of the MSCI World Index is composed of US equities, predominantly the so-called Magnificent 7 tech giants.
American exceptionalism is over
To my mind, the US stock market has simply got too big. And the mighty US dollar has suffocated the global economy.
The consequence of the currently-much-discussed US exceptionalism over the past 15 years may have been good for stock prices, but the public debt mountain has grown every larger. It’s little wonder that the US Central Bank, the Federal Reserve, is desperate to lower interest rates, despite the fear of stoking another wave of inflation. Interest expense on government debt is now bigger than the entire defence budget.
History can teach us a lot. Back in the early 1970s, a group of 50 stocks (nicknamed the Nifty Fifty) spearheaded US global stock market supremacy. Procter & Gamble, IBM, Xerox. All great names making huge profits. However, that didn’t stop the S&P 500 crashing 50% in the 1973/74 bear market. Just as back then, concentration risk magnifies losses. Look at the effect Nvidia‘s recent fall had on the US index, as a stark example.
Dividend stocks
In times of uncertainty, investors turn to reliable dividend-paying stocks, and the FTSE 100 is packed with them. In 2025, analysts expect BP (LSE: BP.) to increase its dividend by £197m and Glencore (LSE: GLEN) by £232m.
Looking at a 5-year share price chart of both stocks, one would assume they are businesses in decline. On the contrary, I believe their rock bottom valuations don’t match the long-term growth story.
Source: TradingView.com
As electricity demand grows in the coming decade from the likes of EVs, heat pumps and data centres, Glencore is set to profit handsomely from an explosion in demand for copper.
It’s a similar story over at BP where demand for oil and natural gas is rising and energy security has gone right to the top of every country’s agenda.
And as for them being dinosaurs? Well, these companies deploy some of the most innovative, cutting-edge technologies across any industry in order to obtain, at scale, the commodities that power every facet of modern life. Both are a core part of my Stocks and Shares ISA portfolio and will remain so for many years.
