The UK stock market has surged in recent months, with the FTSE 100 edging ever closer to the psychologically important 9,000-point threshold. This rally, fuelled by easing inflation and improving economic sentiment, has seen investors regain confidence after a volatile 2022 and 2023.
So, what’s behind the latest momentum — and could the UK’s core index finally break through 9,000 in 2025?
Factors driving the rally
Several things are responsible for pushing UK stock prices higher, especially declining global inflation that’s helped raise hopes that the Bank of England may cut interest rates later this year. Lower rates tend to boost share prices by reducing the cost of borrowing for businesses and increasing the appeal of equities versus bonds.
Secondly, the UK economy is exhibiting signs of stabilisation. While growth remains modest, better-than-expected GDP data and strong employment figures have helped ease recession fears. Many British companies also generate significant revenue from abroad, so a weaker pound boosts earnings from foreign exchange.
Notably, institutional investors are shifting back into undervalued UK assets, which have lagged behind their US counterparts in recent years.
So is the Footsie – often considered cheap on a global basis – starting to attract renewed attention? And when could it hit 9,000?
Having recently surpassed 8,800 for the first time, 9,000 is now within sight. While short-term market movements remain difficult to predict, many analysts believe it could be reached in late 2025 — if interest rates fall and earnings remain strong.
But many things could throw a spanner in the works, such as geopolitical risks, commodity price shocks or unexpected inflation spikes.
The stocks leading the rally
Several blue-chips led the charge in 2024. Rolls-Royce enjoyed a remarkable recovery driven by strong demand in civil aerospace and defence. Energy giants Shell and BP were buoyed by elevated oil prices, while banks Lloyds and HSBC benefited from higher net interest margins.
Consumer-facing companies like Unilever and Diageo are clawing back some growth despite economic challenges, confirming a broader market improvement. But for investors eyeing long-term, stable returns, Legal & General (LSE: LGEN) is the number one stock I think they should consider in today’s market.
The major UK asset manager and insurance stalwart remains a popular choice for investors seeking steady income. At current levels, it trades on a modest forward price-to-earnings (P/E) ratio of 10 and offers a dividend yield of over 8%. Keeping in mind, insurers are highly sensitive to fluctuations in interest rates, bond yields and financial market performance. A sharp downturn in equity or property markets could impact its investment portfolio and solvency position.
Fortunately, it benefits from heavily established structural trends, including pension de-risking, long-term savings and growing demand for retirement products. Although revenue dipped and debt rose in the past year, its balance sheet still looks adequate. Plus, a recent £500m share buyback programme is a sure sign of its dedication to shareholders.
Aiming for income
As optimism returns to the stock market, the FTSE 100 looks well positioned to break new ground. While risks remain, selective investing in high-quality, income-generating stocks could reward patient investors over the coming year.
With potential rate cuts on the horizon, sentiment towards income stocks could improve. That would make Legal & General a candidate worth considering for a passive income portfolio in 2025.
