The year 2025 has brought a pleasant surprise for beleaguered believers in the British stock market. We’re beating the Americans for once! Specifically, the UK’s leading index the FTSE 100 (up 10.9% year-to-date) is handily outperforming the US equivalent, the S&P 500 (up 8.8%), going into the second half of the year.
Budding investors may be asking: will the trend continue? Has there been a reversal in fortunes of the two anglophone states? How much longer can the FTSE 100 keep outperforming the S&P 500?
Tech dominance
Understanding the difference between the two indexes comes largely down to big tech. The US has it. We don’t. That’s not quite true actually. Chip designer (with a $145bn market cap) ARM Holdings is based in Cambridge. The only thing is that it’s listed in US where the rest of the big tech stocks go.
If you cleave the tech sector from the S&P 500, then you actually find it’s much more similar to the FTSE 100 in both valuation and performance. So to answer our question, we need to consider whether tech companies will continue their recent dominance.
One reason to suggest big tech might be overinflated and even approaching bubble territory is the valuations.
Take Palantir (NASDAQ:PLTR), for example. This Denver-based tech firm specialises in big data especially regarding artificial intelligence. It counts our NHS as one of its clients, aiming to reduce waiting lists through analysing vast amounts of patient data.
I first looked at this stock when the shares changed hands for $9 and thought the valuation looked sky-high. And now? The shares have surged to $184 and the valuation is through the roof! The stock trades at 722 times earnings and 137 times sales.
Over a hundred years of revenues to make back the market value? Even with growing earnings, that looks hyper-frothy. I have little interest in owning the shares myeslf at such valuations and would not think it’s a stock I’d suggest others consider either.
Into the future
To go back to the question of FTSE 100 vs S&P 500 performance, I believe the answer will largely be determined by the fate of artificial intelligence.
Should AI deliver on some of the wild conjectures then the Footsie will lag behind. Will it? I must admit I’m sceptical. 3D printing was to usher in a new age of productivity and it didn’t. The internet had similar fanfare and it did – via a rather painful episode that we now call the Dotcom Crash.
Predicting the future is hard. However, not making any prediction at all is boring, so let me lay my cards on the table.
Barring a stunning AI-fuelled increase in company earnings, I think there will be a pullback in AI and tech stocks in the next five years, possibly even a crash. And that will mean the FTSE 100 outperforms the S&P 500 at least some way into the future.
