FTSE 100 at 9,000: dividend yields and weaker pound could drive gains
The FTSE 100 looks set for potential gains in 2025, but might not reach the 9,000 for several years, despite a weaker pound sterling and supportive dividend yields.
FTSE 100 performance context
The FTSE 100 has delivered modest gains in 2024, rising by 5.7%, similar to the STOXX Europe 600 and outperforming the dismal’s French CAC 40 40’s -2% drop due to the country’s political turmoil.
FTSE 100 1-year peer performance comparison chart
Despite also suffering from political instability, the German DAX 40 greatly outperformed the FTSE 100 with its around 20% gain, as did all the US large cap stock indices.
This relative underperformance creates potential catch-up opportunities for UK equity investors heading into 2025.
FTSE 100 technical analysis
Recent support around the psychological 8,000 mark, which held in November and December, suggests growing investor confidence in UK blue chips. As long as this support area and the August low at 7,913 underpin, the FTSE 100 remains in a long-term uptrend and large medium-term sideways trading range.
FTSE 100 daily candlestick chart
For new all-time highs above the May 2024 peak at 8,478 to be made, the key 8,364-to-8,418 resistance zone needs to be overcome. It consists of the June-to-December 2024 peaks.
Only a break through this significant resistance area and advance above last week’s 8,478 record high would push the psychological 9,000 mark to the fore. Such a break higher may not happen in 2025, though, unless US markets continue their two-year double digit winning streak and thus prop the UK blue chip stock index up.
Currency tailwinds for UK stocks
Sterling's 9% decline against the dollar from its September peak and 3.5% fall versus both the euro (from its November 2023 high) and Chinese renminbi could boost FTSE 100 earnings.
The majority of UK shares in the index generate substantial overseas revenues, benefiting from pound weakness.
A weaker currency makes UK exports more competitive while increasing the value of foreign earnings when converted back to sterling.
However, challenges remain in key markets, with China showing limited growth momentum and Germany experiencing economic contraction.
Dividend outlook remains attractive
Share investing in the FTSE 100 continues to offer compelling dividend yields.
Analysts project £83.9 billion in dividend payments for 2025, with further growth to be expected in 2026.
The projected dividend yield stands at 3.8% for 2024 and 4.0% for 2025, based on ordinary payments alone. These are the highest compared to other major stock indices, except for Hong Kong’s Hang Seng at 4.2%.
Major stock indices 2024 returns, PE ratios and dividend yields
The FTSE 100’s low P/E ratio
With a Price-to-Earnings (P/E) ratio of 12.22 for 2024, the FTSE 100 is considered to be “cheap” when compared to its peers, especially the “expensive” 33.1 of the Nasdaq 100, but that in itself doesn’t necessarily mean that it will outperform in the future.
The FTSE 100’s P/E ratio has been falling since the Covid-19 pandemic and slid from its end of 2021 level at 17.10, to 13.88 in 2022 and 10.51 in 2023 before slightly rising to its 12.22 level by the end of 2024.
When looking at the FTSE 100’s 5-year performance once can clearly see that the indices’ low P/E ratio is not inversely correlated to market performance.
FTSE 100 5-year peer performance comparison chart
Over a 5-year span the FTSE 100 only gained around 7.5% (not adjusted for inflation) which is dismal when compared to the STOXX 600 and French CAC 40's 20% gains, the Dow Jones Industrial Average’s near 45% return and the DAX 40’s 50% win.
UK blue chip share buybacks
It is not all doom and gloom for the FTSE 100, though, as additional shareholder returns through share buybacks, with around £56.5 billion in 2024, demonstrate corporate confidence in the UK stock market.
Looking ahead to 2025, while specific figures are not yet available, analysts anticipate that this trend will continue, with share buybacks remaining a significant component of shareholder returns. This expectation is supported by the robust cash generation of these companies and their ongoing efforts to enhance shareholder value.
It's important to note that the actual amount of share buybacks in 2025 will depend on various factors, including individual company performance, broader economic conditions, and strategic capital allocation decisions. Investors should monitor company announcements and financial reports for specific details as they become available.
Key factors to watch in 2025
Global economic conditions, particularly in major trading partners like the US and China, will influence FTSE 100 performance.
Interest rates and monetary policy decisions could impact sterling and market sentiment.
Persistently high inflation and rising UK Gilt yields may lead to an appreciating the Pound Sterling and could have a detrimental effect on the FTSE 100’s performance.
Corporate earnings growth and continued shareholder returns will be crucial for sustaining momentum.
Only if the key 8,364-to-8,418 technical resistance zone were to be overcome, would a medium-term upside breakout become feasible.
How to trade the FTSE 100
- Research current market conditions and understand the factors affecting UK stocks
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- Open an account with IG to access UK markets
- Select your preferred trading instrument and develop your strategy
- Monitor your positions and manage risk appropriately
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