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Is 7,390 as good as it gets for the FTSE 100?

Earlier this month, the FTSE 100 reached an all-time high of 7,390 points. Although this went unnoticed by vast swathes of investors, there is probably a very good reason for that. Since the FTSE 100 has stormed over 10% higher in the last six months, there is a general feeling of optimism among investors. In other words, more gains are expected, so record highs in the index’s level are not being greeted with the fanfare which would normally be anticipated.

A difficult outlook

However, there is a strong case for marking all-time highs in the FTSE 100’s price level. The outlook for the global economy is highly uncertain, and this could mean that 7,390 is as good as it gets for the index for some time. In fact, it is difficult to see a significantly higher level over the coming months.

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A key reason for this is Brexit. Talks are set to start in the very near future, and this could either improve investor sentiment in the UK, or cause it to deteriorate. In the case of the former, this may be bad news for the FTSE 100. Since the EU referendum, the UK’s main index has benefitted from uncertainty surrounding the UK economy through weaker sterling. Since many of the index’s constituents have major operations abroad, they have experienced a sterling bounce. However, if talks between the UK and EU progress better than expected and cause investor sentiment to improve, a stronger pound could push share valuations lower.

Similarly, if talks between the UK and EU fail to progress in an amicable and constructive fashion, the FTSE 100 could experience a falling valuation. An uncertain future for the UK and EU would be likely to hurt the outlook for the global economy, since the region is one of the most important to the world’s economic performance. As such, it seems as though the FTSE 100 is heading lower in the short run.

A bright long-term future?

Despite this, the long-term future for the index appears to be relatively bright. A key reason for this is the dividend yield of the FTSE 100, which currently stands at around 3.7%. This is historically high and indicates there is significant upside potential on offer in future years. That’s especially the case while the S&P 500 has a dividend yield of just 2%.

Furthermore, the FTSE 100 contains a range of companies with strong balance sheets, wide economic moats and margins of safety. They are likely to deliver relatively strong earnings growth even during what may prove to be a challenging period for the world economy. Therefore, they are likely to make gains in the long run and this should push the FTSE 100 on to even more record highs. In the meantime though, more records may have to wait for now. That makes the coming months a potentially stunning buying opportunity for long-term investors.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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