Interactive Investor

Earnings uncertainty hits FTSE 100 outlook

It’s been a lacklustre year for the FTSE 100 index, particularly in comparison with Wall Street. How do these two City firms view prospects in 2024?

13th December 2023 13:19

Graeme Evans from interactive investor

A lack of earnings momentum for London’s collection of old economy stocks means year-ahead forecasts continue to overlook the FTSE 100 index.

The blue-chip benchmark has underperformed the broader European market by 8% in 2023, driven by commodity price pressure and impact of a stronger pound.

The comparison with Wall Street is stark, with speculation of interest rate cuts and sustained technology sector buying last night helping the S&P 500 index to its highest level since January 2022 following a year-to-date gain of 21%. 

The FTSE 100 index is broadly unchanged at 7,567 but Bank of America told clients this week that it sees a potential 13% downside for the FTSE 100 to 6,550 by the end of 2024.

Its pessimism is linked to the likelihood of further oil price weakness over the first six months of next year as global growth slows.

Counterparts at UBS have a more optimistic target of 8,160 by the end of next December, but the Swiss bank is least preferred on UK equities within its global equities coverage. 

It notes that the FTSE 100 trades on a 12-month forward price-to-earnings multiple of 10.4 times, around 15–20% below its long-run average and a third lower than global equities. 

However, UBS strategist Caroline Simmons said this discount reflected the top flight’s reliance on value sectors such as financials, energy, and commodities. 

She added: “While the UK equity market looks attractively valued, valuation is not normally a driver in the short term, but earnings momentum is.”

A squeeze on banking industry profitability as interest rates appear to have peaked means the UK market is on track for 5% earnings growth in 2024, weaker than other markets where there’s also the potential for stronger earnings revisions.

Offsetting the moderate capital appreciation, UBS said the UK’s 4% dividend yield continues to offer appeal.

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