Since the pandemic, the FTSE 100 has vastly outperformed. Historically, the UK’s flagship index has generated an average total annualised return of 8%. But since October 2020, it’s been moving at a far more impressive pace.
In fact, including dividends, passive index investors have earned a solid 91.3% total gain in the last five years. That’s the equivalent of 13.9% a year, enough to transform a £5,000 initial investment into £9,567. Yet that pales in comparison to what some FTSE 100 stocks have achieved. Rolls-Royce (LSE:RR.), for example, is up 1,424%, rewarding some stock pickers with £76,200!
Of course, past performance doesn’t guarantee future results. So the question now is, how much money could investors make from the FTSE 100 and Rolls-Royce if they invest £5,000 today?
Inspecting forecasts
Let’s start with the index. The outlook from institutional investors regarding the UK’s largest businesses seems to be fairly positive. Analysts at Citigroup have flagged further room for upward momentum as global earnings are expected to recover in 2026. Don’t forget, most of the profits from FTSE 100 companies come from international markets.
Combining this with expected artificial intelligence (AI)-fuelled productivity gains and further interest rate cuts from the Bank of England, the investment bank’s recently raised its price target from 9,300 to 9,700 points.
Sadly, that’s not actually much higher than where the index sits today. Assuming the projection’s accurate, that translates into a 5.1% gain, 3.2% of which comes from dividends. In other words, most of the expected growth seems to already be baked into share prices on average. And a £5,000 investment may only grow to £5,257 by this time next year.
What about Rolls-Royce shares? Here, the story’s a bit more interesting. Even after its massive surge, management’s continued guidance of higher earnings and free-cash flow generation has resulted in a strong bullish sentiment. So much so, that the analysts at UBS have place a share price target of 1,350p by this time next year.
When combined with the stock’s 0.65% dividend yield, that translates into a far more substantial 17% potential gain – turning £5,000 into £5,851.
Are these expectations realistic?
Seeing a slowdown in growth after such a strong period is fairly standard in the stock market, especially when valuations are reaching new all-time highs.
However, for Rolls-Royce, it’s important to note that UBS’s projection is among the most optimistic. There’s a strong bull case to be made regarding operational execution, improved cash conversion, alongside structural and cyclical tailwinds within the energy, defence, and aerospace markets.
However, there’s a risk that this may change in the near future. The bulk of revenue still comes from servicing civil aircraft, linking the business to the long-haul travel market.
But with fears of a weaker economic outlook in the UK and US, travel demand could begin to suffer, slowing Rolls-Royce’s momentum. And for a stock already trading at a premium, that could open the floodgates to share price volatility.
That’s why not all institutional analysts are as optimistic as UBS. And it’s why I think there are other FTSE 100 opportunities that are looking far more attractive to consider right now.
