FTSE 100 hits record high – where to next?

FTSE 100 trades in record highs

The FTSE 100 has risen by around 2.75% year-to-date and on Friday, 17 January 2025, it hit a new record high near the 8,500 mark, surpassing its May peak.

Within just a couple of weeks, the FTSE 100 has already nearly achieved half of its 5.7% gain from 2024. This performance is supported by positive factors such as a weaker British pound sterling, a low Price to Earnings (P/E) ratio, and a high dividend yield, making it an attractive proposition for investors.

Despite its significant outperformance compared to the FTSE 250, which has not seen any gains this year, and even US indices such as the S&P 500, the FTSE 100 is still underperforming its European counterparts, which have risen by close to 5% in the past couple of weeks.

​FTSE 100 year-to-date peer performance comparison chart

FTSE 100 seen as undervalued amid shifts in currency and investment focus

The shift away from US large-cap stocks, particularly the Magnificent Seven and 'expensive' technology stocks with high P/E ratios, has benefitted the FTSE 100 and other European stock indices. Fund managers find these shares more attractive, especially as the strong US dollar makes US stocks more expensive and the weak euro and pound sterling make European shares relatively cheaper.

The majority of UK shares in the FTSE 100 generate substantial overseas revenues, which benefit from the weakness of the pound.

Sterling's 9% decline against the dollar from its September peak enhances the competitiveness of UK exports and increases the value of foreign earnings when converted back to sterling.

FTSE 100’s competitive P/E ratio draws fund managers

The FTSE 100’s low P/E ratio of 12.22 for 2024 makes UK blue-chip shares attractive compared to the higher P/E ratios seen in other major indices. For comparison, the S&P 500 has a P/E ratio of 25, while the Nasdaq 100 stands at 33.1.

This disparity is why fund managers decided to shift investments from US, especially mega-cap, shares into more "affordable" European stocks at the start of the year.

​Major stock indices 2024 returns, PE ratios and dividend yields

Dividend outlook and share buybacks make the FTSE 100 attractive

Investing in the FTSE 100 offers compelling dividend yields.

Analysts forecast £83.9 billion in dividend payments for 2025, with expectations of further growth into 2026.

The projected dividend yield is set at 3.8% for 2024 and 4% for 2025, based solely on ordinary payments. These rates are among the highest across global stock indices. Additional returns to shareholders through share buybacks, amounting to approximately £56.5 billion in 2024, underscore corporate confidence in the UK stock market.

While specific figures for 2025 are yet to be determined, analysts anticipate that this trend will persist, with share buybacks continuing as a key component of shareholder returns. This outlook is supported by the robust cash generation of these companies and their continuous efforts to enhance shareholder value.

The actual volume of share buybacks in 2025 will hinge on various factors, including broader economic conditions, UK interest rates, monetary policy decisions and their effects on sterling, individual company performance, and strategic capital allocation decisions. Investors are advised to keep an eye on company announcements and financial reports for detailed updates as they emerge.

FTSE 100 technical analysis

With the FTSE 100 having surpassed its May peak, it has hit a new all-time high close to the 8500 mark, raising the question among investors about how high the index could go in 2025. The next upside target is set at 8642. This is calculated by taking the 729-point gain from the April to May 2024 advance and projecting it from the August 2024 low of 7913.

Another possible upside target is 8723, determined by adding the 729-point rise from April to May 2024 to the December low of 7994. Above this, the 9000 level looms as a significant psychological target. The zone from 8418 to 8364, the major key resistance area from June to December, now acts as a support zone due to inverse polarity. It is considered a medium-term technical buying zone for investors who missed this week's rise in the UK blue-chip index.

The FTSE 100 maintains bullish trends in the short, medium, and long term, underpinned by the June peak of 8364 on a daily chart closing basis. Only an unexpected bearish reversal falling through the 14 January low at 8180 would lead technical analysts to reconsider the current bullish scenario.

​FTSE 100 daily chart