FTSE 100 vs FTSE 250: one of them is in a ‘sweet spot’
Despite a strong 2025 so far, there’s still lots to love about UK stocks, argues one team of City analysts. Graeme Evans reveals which stocks it prefers.
22nd July 2025 13:20
by Graeme Evans from interactive investor
A preference for UK mid-caps was today highlighted by a City bank after it said the FTSE 250 index looked to be in a “sweet spot” of valuation and growth.
UBS said the earnings leverage of mid-caps to a domestic recovery has the potential to drive outperformance relative to the FTSE 100's multinational, slower growth profile.
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It adds that positioning in FTSE 100 defensives is starting to look crowded after active investment flows turned more positive to UK equities in July.
The FTSE 100 index set another record intraday level early today, having advanced by more than 10% so far this year to close last night at an all-time high of 9,012.99.
Highlights in today’s blue-chip session included the sight of BT Group (LSE:BT.A) shares at £2, a big advance for British Gas owner Centrica (LSE:CNA) and a further recovery for Glencore (LSE:GLEN).
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Large-caps have outpaced Europe’s Stoxx 600 as well as the FTSE 250 index, which is now up by 6% year-to-date after a recovery of more than 20% from April’s post-tariffs low.
Despite this year’s improved performance, UBS said UK equities continued to trade at attractive valuations both in absolute and relative terms.
It said: “By historical standards the UK’s valuation gap remains wide, and there is still a lot of value in UK small and mid-cap stocks.
“Low multiples, combined with high dividend yields underline the UK market’s appeal, and there is room for further re-rating if earnings prove resilient and political risks abate.
“For now, UK equities offer cheapness with a catalyst, the fundamental discount is well known, and any improvement in macroeconomics or clarity in policy could help close the gap further.”
UBS said high-profile milestones such as the FTSE 100’s record high and easing interest rate fears have improved sentiment, meaning global investors are starting to notice the UK again.
The bank’s high-conviction strategy call on UK equities is a preference for mid-caps over large-caps for the next phase of the cycle.
It said: “The FTSE 250 offers a ‘sweet spot’ of valuation and growth, it is dominated by domestic-facing businesses poised to benefit from a UK economic uptick, yet it trades at a significant discount to the FTSE 100 and global peers.
“Notably, even quality mid-cap names are cheaper than large-caps.”
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UBS said its trade idea sought to capitalise on the upside in “unloved” British companies at a time when value, growth and improving fundamentals are aligning in the mid-cap space.
Going into the second-quarter reporting season, UBS said the profit outlook is one of cautious resilience amid the uncertain economic climate.
Earnings revisions have been mostly negative for 2025, with the City consensus now pointing to modest per share growth of about 2% and 15% for the FTSE 100 and FTSE 250 respectively.
This reflects pressure in key sectors such as energy and materials, whereas more domestically oriented and defensive sectors such as financials and utilities have fared better given relatively stable or improving earnings prospects.
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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.