The FTSE 100 is currently sitting around the 7,400 mark, only a few percentage points off its all-time high. Can it go higher from here? Could it hit 10,000? Here are my thoughts.
Share price falls
While the FTSE 100 is within touching distance of its record high, a closer inspection of the index reveals that many of its constituents are struggling right now. Indeed, according to Stockopedia, 30 stocks in the index are currently more than 15% below their own 52-week highs. 20 of those stocks have fallen 20% from their highs.
And there’s some big names on that list. GlaxoSmithKline has fallen 24%. Barclays is down 23%. Imperial Brands and National Grid are off 21%. BT has declined 38%. These companies all have significant weightings in the index. If some can recover, the footsie could potentially move much higher.
Furthermore, at current levels, the index doesn’t appear to have an expensive valuation. It currently trades on a forward P/E ratio of 15.3, with a forward dividend yield of 3.3%. Those metrics look very reasonable in my opinion.
The FTSE 100’s largest weighting, HSBC Holdings has a forward P/E of just 13.9. Royal Dutch Shell B trades on a P/E of 15.8. These are not high valuations. And many stocks can be picked up cheaply. Lloyds Banking Group has a forward P/E of just 8.4. Legal & General Group trades on 10.6.
There are also big dividend yields on offer. Lloyds is forecast to yield 6.1% this year. Shell is yielding 5.9%. These figures suggest to me there’s very little exuberance associated with the index at present.
There is exuberance associated with other asset classes right now though. Look at Bitcoin. It’s price has risen from $740 to $8,200 in the last year alone, a gain of over 1,000%. To a lesser degree, many small-caps and tech stocks have got investors excited. However, investors generally remain quite level headed about blue-chip FTSE 100 stocks, and that suggests the index could run higher.
However, the elephant in the room, for me, is the US market. The FTSE 100 has risen around 9% excluding dividends in the last year. In comparison, the S&P 500 has surged around 17% in the same period. And many key stocks in this index now trade at insanely high valuations.
For example, Amazon has a trailing 12-month P/E ratio of 295. Netflix trades on 196. Facebook has a ratio of 40. Sure, these companies are growing at a faster rate than most of the FTSE 100’s key stocks, but those valuations are high and don’t leave much room for error.
It wouldn’t surprise me to see a pullback in the US market, and unfortunately, if that happens, the FTSE 100 is likely to follow.
So can the index rise to 10,000 points next year? That would be a 35% rise from the current level. To me, that’s unlikely. However, I do believe the index can potentially keep rising from here. I think much will depend on whether we see the pullback in the US market. Watch this space.
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Edward Sheldon owns shares in Lloyds Banking Group, Imperial Brands, GlaxoSmithKline, Legal & General Group and Royal Dutch Shell. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Facebook, GlaxoSmithKline, and Netflix. The Motley Fool UK has recommended Barclays, HSBC Holdings, Imperial Brands, Lloyds Banking Group, and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.