Why has the S&P 500 outperformed the FTSE 100?

Understanding the performance gap

The S&P 500 has significantly outpaced the FTSE 100 in recent decades, delivering higher returns for investors.

Over the past decade, the S&P 500 has averaged an 11.5% annual return, compared to just 1.5% for the FTSE 100. If trends continue, the S&P 500 will surpass the FTSE 100 in numerical terms by late 2028, a notable shift given historical levels. This milestone underscores the divergence in performance between the two markets.

Since the 2008 financial crisis, this divergence has become more pronounced, with the gap widening notably. The performance gap reflects deeper structural differences between the markets, including sector weightings and economic conditions.

Sector composition drives divergent returns

The S&P 500's outperformance is largely due to its sector composition. Technology giants like Apple, Microsoft, and Amazon drive growth through innovation and scalability.

In contrast, the FTSE 100 is dominated by traditional sectors like finance, energy, and mining. Companies like HSBC and BP are part of more cyclical industries with lower growth prospects.

The tech sector's growth has been a key driver of United States (US) market returns. The five largest S&P 500 tech companies often have more market value than the entire FTSE 100. This structural difference means the FTSE 100 has missed out on the digital economy's transformation, which the S&P 500 has fully captured.

Economic and monetary policy differences

The US economy has grown faster than the United Kingdom's (UK), supported by consumer spending, business investment, and innovation. This economic strength has fostered corporate profit growth.

Monetary policy has also played a crucial role. The Federal Reserve's (Fed) policies, including quantitative easing, have supported US equity valuations through lower interest rates and abundant liquidity.

Currency dynamics have impacted returns. The strong US dollar has often enhanced returns for international investors in S&P 500 stocks, while British pound sterling weakness has sometimes deterred foreign investment in the FTSE 100. Trading platforms have made it easier to access both markets, though currency considerations remain important for international investors.

Investment culture and corporate behaviour

The markets exhibit distinct investment cultures. FTSE 100 companies typically prioritise dividend payments, appealing to income-focused investors but potentially limiting growth investment.

S&P 500 companies, especially in tech, tend to reinvest profits for growth or conduct share buybacks. This approach has supported stronger share price appreciation over time. The online trading landscape reflects these differences, with many UK investors seeking dividend income while US markets attract growth-oriented traders.

These cultural differences influence capital allocation and affect long-term returns for investors.

Brexit impact and market confidence

Brexit has created headwinds for UK stocks, introducing uncertainty that has dampened investor confidence and potentially deterred international investment in the FTSE 100.

The trading for beginners landscape has become more complex in the UK market, with Brexit-related volatility requiring careful consideration of timing and position sizing.

While the S&P 500 has benefited from relative political stability, the FTSE 100 has navigated Brexit negotiations and their aftermath, affecting sentiment and business conditions. This political uncertainty has contributed to lower valuation multiples for UK stocks compared to their US counterparts.