Trading Strategies: share price growth ahead for Marks & Spencer?

A Marks & Spencer store in Bristol, England. Photo: Matt Cardy/Getty Images.

Investors could be forgiven for thinking that the UK is destined to have perennially high inflation. Indeed, the annual rate of price rises increased by 20 basis points to 3.4% in December having fallen in each of the previous two months. It has now been above the Bank of England’s 2% target for 45 out of the past 48 months.

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Persistently high inflation inevitably heaps pressure on consumers, since it acts as a constant drag on their spending power. In addition, constant above-target inflation reduces the chances of interest rate cuts to boost what continues to be an ailing economy suffering from high and rising unemployment, as well as a persistently lacklustre growth rate.

Inherent cyclicality

Given such an environment, buying domestically focused firms that are reliant on consumer spending levels may seem counterintuitive. After all, their tough operating environment is unlikely to provide scope for rapid profit growth, thereby potentially hurting investor sentiment and leading to relatively downbeat share price performance alongside heightened volatility.

However, the economy’s weak state is highly unlikely to exist in perpetuity. Its long-term track record shows that GDP growth, and therefore the operating environment for consumer-focused firms, is inherently cyclical. Previous periods of weak economic performance have been followed by stronger eras, and vice-versa. This means that investors able to take a long-term view of the economy’s performance, and the prospects for consumer-related firms that are highly reliant on it, could benefit from a recovery over the coming years.

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A margin of safety

Crucially, valuations among consumer-focused companies that are heavily exposed to the UK economy are presently at a low ebb. Indeed, at a time when the FTSE 100 is trading close to a record high and has a price/earnings (PE) ratio of around 20, it is possible to unearth UK-focused consumer stocks with earnings multiples of little more than half that amount.

As a result, they offer significant scope for an upward rerating as the economy progresses through its cycle, and their operating conditions gradually improve. This could translate into meaningful capital returns that are ahead of those of the wider stock market. And in the meantime, solid financial positions and clear competitive advantages, which several UK consumer-focused firms appear to have, mean they may be well placed to overcome ongoing economic uncertainty in the short run.

Potential catalysts

Of course, catalysts are required to produce a stronger economic performance and much-improved trading conditions for UK-focused consumer companies over the long run. On this front, inflation is expected to fall at a brisk pace from its current level, according to the Bank of England, so that it moves closer to the central bank’s 2% target by the middle of 2026.

When combined with the economic challenges being experienced in the UK, as well as an uncertain global economic outlook amid heightened geopolitical risks, this means that further interest rate cuts could realistically be enacted. They should bolster prospects for GDP growth, employment levels and, crucially, improve the outlook for spending power among consumers when combined with a more modest inflation rate.

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Additionally, the full impact of recent interest rate cuts is unlikely to have yet been felt due to the existence of time lags. In fact, Bank Rate has fallen by 100 basis points in the past 12 months alone.

Once time lags have passed, the full effects of a looser monetary policy are set to contribute to a 1.3% GDP growth rate and a 1.5% expansion in 2026 and 2027, respectively, according to the International Monetary Fund (IMF). Given that GDP growth rates of just 0.2% and 0.1% were recorded in the UK during the second and third quarters of 2025, respectively, this suggests that consumer-focused UK stocks could deliver relatively attractive returns in the coming years as their operating conditions gradually improve.

A low valuation

Source: ShareScope on 27 January 2026. Past performance is not a guide to future performance.

FTSE 100 consumer-focused firm Marks & Spencer Group (LSE:MKS) appears to offer good value for money on a long-term view. Although the food, clothing and home retailer’s share price has surged 10% higher over the past month, poor performance in prior months means that it currently offers a wide margin of safety.

Indeed, the company’s shares trade on a PE ratio of 11.9 using earnings from its latest financial year. Of course, the firm has experienced a major cyber attack since then that contributed to a 55% decline in its earnings per share in the first half of the current year. This means that profits for the full year to March 2026 are forecast to be 25% lower than in the previous year.

However, looking ahead to the 2027 financial year, the retailer’s bottom line is set to rise by 45% year on year and be 9% higher than it was in 2025. This means that it has a forward PE ratio of 10.7, which compares favourably to the wider index’s aforementioned earnings multiple.

This suggests there is scope for a sizeable upward rerating, with the company’s bottom line also likely to benefit from falling inflation, lower interest rates and an increasingly upbeat outlook for UK consumers that could translate into further profit growth.

Sound fundamentals

Marks & Spencer’s latest trading update, which covered the Christmas period, highlighted that it is performing well despite experiencing challenging operating conditions.

Encouragingly, its share of the UK grocery market rose to an all-time high of 4%, while its fashion, home and beauty segment is now ahead of peers when it comes to customer perceptions of style, quality and value. This is important because it suggests that the firm’s competitive position is improving, via a higher level of customer loyalty, which may lead to greater pricing power and higher profits in the long run.

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The company’s cost reductions could also bolster its competitive position by supporting profit margins. In the 2025 financial year, for example, it delivered structural cost reductions of £120 million, and in its half-year results said it increased the cumulative 2028 target from £500 million to £600 million.

The company’s financial position, meanwhile, appears to be relatively robust. Although net debt rose by 17% year on year in the first half of the current financial year, it nevertheless equates to a net debt-to-equity ratio of 85%. And in its most recent full financial year, the firm’s net interest costs were covered 5.6 times by operating profits.

Risk/reward ratio

Clearly, Marks & Spencer’s share price could prove to be relatively volatile in the short run. After all, it is currently operating in an environment where disposable incomes are being squeezed by high inflation, while unemployment is relatively high and meaningful UK GDP growth is severely lacking. As well as acting as a drag on its financial performance, this could mean investor sentiment remains at a low ebb in the near term.

But with a low valuation based on its forecasts for the 2027 financial year, the company’s shares appear to be undervalued both in absolute terms and relative to the wider FTSE 100 index. When combined with an improving operating outlook amid the prospect of falling inflation and further interest rate cuts, as well as solid fundamentals in terms of its balance sheet and competitive position, the stock appears to offer long-term investment potential.

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