Can GSK shares outperform FTSE 100 index over the long run?

The FTSE 100 has performed exceptionally well in the past year. It has risen by over 14% and outperformed other major developed market indices such as the Dow Jones and Germany’s DAX, which are up 11% and 7%, respectively, over the same period.

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The strong performance of the UK’s large-cap index is, of course, the most recent instalment of what has proved to be a five-year purple patch. Indeed, the FTSE 100 has risen by 52% in total since September 2021.

In the 21 years prior to that, the index struggled to post any kind of meaningful gains. In fact, it rose by just 7% in total between 2000 and 2021 after experiencing an excellent performance in the mid-to-late 1990s.

Some investors, therefore, may naturally be concerned about the FTSE 100’s prospects. Will the next five years represent a continuation of its recent strong performance? Or are the index’s future returns likely to revert to its far less sanguine longer-term track record?

Uncertain short-term prospects

Clearly, the near-term outlook for the FTSE 100 is highly uncertain. Persistent above-target inflation in the UK and across several major developed economies, including the US and the eurozone, means that interest rate rises are firmly on central bank agendas.

Already, the Federal Reserve and the European Central Bank have implemented tighter monetary policies over recent months, with the Bank of England having the potential to follow suit given an anticipated 30 basis point rise in inflation to 3.4% by the end of the year.

Higher interest rates are likely to constrain the operating environment of FTSE 100 members, especially given their international bias. And with geopolitical risks such as a global trade war and conflict in the Middle East likely to persist in the coming months, the financial prospects of index members and investor sentiment towards their shares could realistically weaken.

Long-term catalysts

Beyond a short-term period of elevated volatility, though, the index’s prospects appear to be relatively bright on a long-term view.

Crucially, it remains undervalued even after its recent strong gains. The FTSE 100 currently trades on a forward price/earnings (PE) ratio of around 12.4, which is below the 12.8 median figure recorded since 1990.

This suggests there is scope for an upward rerating. The index’s PE ratio even has the potential to rise to a figure above its long-term average, at least for a period of time, given the stock market’s inherent boom-and-bust cycle. This could lead to further capital gains in future.

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Perhaps more substantive over the long run, though, is the potential for fast-paced earnings growth among the index’s members. Inflation in the UK, the US and the eurozone is widely expected to meet, or at least be very close to, 2% central bank targets over the next two years.

As a result, policymakers are set to have scope to implement a more accommodative monetary policy that, following the passing of time lags, is likely to bolster GDP growth rates and lead to improved operating conditions for FTSE 100 firms.

This should act as a catalyst on their earnings growth rate. It may also lead to improved investor sentiment towards their shares that ultimately prompts higher ratings. Over time, this may boost the UK large-cap index’s return prospects and enable it to continue its recent strong performance over the coming years.

Much-improved performance

Source: ShareScope at 29 September 2026. Past performance is not a guide to future performance.

Of course, investors who focus on FTSE 100 constituents with the most favourable risk/reward ratios could generate even higher returns than the index. For instance, focusing on firms with even greater scope for an upward rerating, sound financial positions and which have several significant earnings growth catalysts may deliver superior returns to the FTSE 100 over the long run.

For example, biopharmaceutical company GSK (LSE:GSK) appears to have investment potential after its encouraging recent share price performance. The FTSE 100 stock has produced a 35% capital gain in the past five years.

Yet, as per the UK large-cap index’s longer-term track record, GSK failed to deliver substantial capital gains prior to its recent rise. In fact, its shares traded no higher five years ago than they did in 1997.

Growth opportunities

Even after experiencing improved performance in recent years, the company’s shares continue to trade on a relatively attractive market valuation. Their forward earnings multiple stands at just 10.4. This represents a sizeable discount to the 12.4 forward PE ratio of the wider index and suggests there is scope for an upward rerating, especially when the firm’s attractive profit outlook is taken into account.

In the next financial year, GSK is forecast to post a 7% increase in earnings per share. In the longer term, moreover, the rising prominence of the company’s specialty medicines segment means it is becoming increasingly well placed to capitalise on rising demand for treatments in areas such as oncology and respiratory.

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Indeed, the annual number of new cancer cases is forecast to rise to nearly 35 million by 2050, up from roughly 21 million at present, according to the World Health Organization. And with the world’s population expected to rise from around eight billion to roughly ten billion in 2060, according to current United Nations forecasts, a growing prevalence of other non-communicable diseases such as asthma and lupus is likely to act as a catalyst on the firm’s financial performance over the long run.

Solid fundamentals

GSK’s sound financial standing means it can continue to invest in its pipeline of new drugs to capitalise on a sustained rise in demand for the treatment of non-communicable diseases. Its latest half-year results showed a net debt-to-equity ratio of 88%. Its net interest costs, meanwhile, were amply covered 10.3 times by operating profits during the first six months of its current financial year.

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In addition, the company’s interim results outlined plans to accelerate investment in research and development (R&D) via an ambitious efficiency programme. This is expected to yield up to £1.9 billion in annual savings by 2029, with at least part of this sum set to be invested in bolstering its pipeline of new drugs.

A solid balance sheet also provides scope for the business to make acquisitions to further catalyse its long-term financial performance. Indeed, the company announced three acquisitions in just the first six months of its current financial year.

Risk/reward ratio

Clearly, GSK’s share price could prove to be relatively volatile at times. Although it has inherent defensive characteristics due to its relative lack of dependency on the world economy’s performance, disappointments regarding the progress of its drug pipeline and the loss of exclusivity on existing treatments have historically led to sharp fluctuations in investor sentiment and in share price performance.

The company, though, appears to be well placed to deliver attractive capital returns over the long run. Its relatively low earnings multiple, solid fundamentals and upbeat profit growth prospects mean it has the potential to outperform what could prove to be a buoyant FTSE 100 index in the coming years. 

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.