Trading Strategies: an overlooked FTSE 100 stock to consider

While the UK’s rate of inflation was unchanged at 2.8% in May, it is forecast to spike to 3.7% by the end of the year. If met, this would be its highest level since September 2025.

Already, other developed economies, notably the US and the eurozone, are experiencing a surge in inflation as the impact of elevated energy prices caused by the war in Iran filters through. Inflation in the US, for example, rose by a further 40 basis points to a 37-month high of 4.2% in May. Similarly, the eurozone’s inflation rate moved 20 basis points higher to 3.2% in May. This is its highest level since September 2023.

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Of course, monetary policy tightening is the natural response of central banks to rising inflation. The European Central Bank’s decision to raise interest rates by 25 basis points to 2.25% at its June meeting, therefore, is not particularly surprising. Indeed, while the Bank of England and the Federal Reserve have thus far left interest rates unchanged during 2026, they may come under a degree of pressure to respond to a rapid pace of price rises over the coming months.

An evolving outlook

Clearly, the prospect of rising inflation and interest rate increases is not typically conducive to a buoyant economy and, therefore, a rising stock market. And when geopolitical risks such as the possibility of further conflict in the Middle East, as well as prospective changes to fiscal policy in the UK resulting from a new prime minister, are factored in, investors may naturally adopt a bearish stance regarding the stock market’s outlook.

However, inflation in the UK, US and the eurozone is expected to materially decline over the medium term. In the UK, for example, it is set to fall to 2.3% by the end of next year. Meanwhile, in the US and the eurozone, the latest central bank forecasts state that they expect inflation to meet their 2% target by the end of 2028.

This should mean that central banks in all three geographies are able to avoid the adoption of a materially hawkish stance in the near term. It may even allow them to become more dovish, in terms of reducing interest rates during 2027 if inflation begins to fall as per current expectations and its forecast terminal level remains roughly in line with central bank targets.

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In turn, falling interest rates and modest inflation should act as a positive catalyst on the world economy’s performance. This could lead to improved operating conditions for a wide range of sectors, particularly those that are relatively cyclical such as industrial firms and consumer-focused companies, that may ultimately translate into higher share prices.

Focusing on fundamentals

As a result, now could prove to be a worthwhile moment for investors to adopt a bullish, rather than bearish, stance regarding the stock market’s prospects.

Indeed, on a long-term view, several FTSE 350 companies appear to offer good value for money based on their earnings growth potential amid an era of modest inflation, falling interest rates and buoyant global GDP growth. Not only could this provide scope for capital gains in the long term, it may also help to support their share price performance during what remains an uncertain near-term outlook.

Clearly, it is crucial to only focus on companies that have the financial means and competitive position to overcome what may yet prove to be a challenging period.

Indeed, given that geopolitical risks typically spike without prior warning to prompt severe share price volatility across a wide range of sectors, firms with modest debts, dominant market positions and substantial customer loyalty are likely to prove relatively valuable. Such firms could offer scope for strong capital gains on a long-term view – even if the near-term outlook for inflation, interest rates and the economy may suggest otherwise.

Value for money

Source: ShareScope, 24 June 2026. Past performance is not a guide to future performance.

For example, FTSE 100 member Smiths Group (LSE:SMIN) currently appears to offer a favourable risk/reward ratio on a long-term view.

Although a near-17% share price rise over the past year means the engineering company trades on a relatively rich forward price/earnings (PE) ratio of 25.3, which is roughly double the forward earnings multiple of the UK’s large-cap index, it is forecast to post a rise in earnings of 14% in its next financial year. This compares with a typical mid-single digit annual growth rate in the earnings of FTSE 100 firms, which indicates that it offers relatively good value for money.

As a cyclical business, of course, the company is well placed to capitalise on an improving outlook for the world economy over the medium term. Alongside this, the changes the firm is making to its structure could act as a positive catalyst on its financial performance in the long run. Those changes include recent and ongoing disposals, for example, that are expected to leave it focused on segments which offer scope for higher profit margins and superior growth potential.

Returning excess capital

In the meantime, the firm’s financial position suggests it is well placed to overcome an uncertain near-term outlook for the world economy. For example, its net debt-to-equity ratio stood at 52% at the time of its half-year results in January, while its net interest coverage ratio amounted to just under eight in the first six months of its current financial year.

A solid balance sheet also provides scope to make acquisitions to access additional long-term growth opportunities. Indeed, Smiths Group has a strong recent history of engaging in M&A activity to enhance its range of operations. Modest debt levels, moreover, mean that the company can use excess capital to engage in a substantial share buyback programme that is set to be further boosted by the proceeds from asset sales.

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As at the time of its third-quarter trading update in May, the firm had repurchased around half of the planned £1 billion of shares as part of the current calendar year’s buyback programme. It also intends to subsequently return an additional £1.5 billion to shareholders via a mixture of share buybacks and a structured return, which could be a special dividend or tender offer for example, during the 2027 calendar year and following the completion of an ongoing asset disposal.

Given that the company’s shares appear to offer relatively good value for money at present, and its debt levels are modest, repurchases appear to be a sensible use of excess capital.

Risk/reward opportunity

Of course, Smiths Group’s latest quarterly update highlighted that its operating conditions have recently become more challenging due largely to elevated geopolitical risks in the Middle East. Although it maintained overall earnings guidance for the full year due to an increase in its anticipated profit margin, its organic revenue growth forecasts (which exclude the impact of acquisitions and disposals) were downgraded from 3-4% to around 2%.

Given the highly fluid situation in the Middle East and elsewhere, it would be unsurprising for the company’s shares to display heightened volatility at times in the coming months. However, its strong financial position, solid strategy in terms of focusing on segments with superior profit prospects, and upbeat earnings growth outlook suggest that the company could offer investment potential over the long run.

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