Trading Strategies tip 2026: a FTSE 100 cyclical play

Many investors understandably avoid expensive shares. After all, stocks that have a high earnings multiple typically offer less scope for an upward rerating than their cheaper counterparts. This can mean their long-term investment prospects are relatively unappealing, given that any future capital growth is likely to be largely predicated on an increase in earnings.

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Investors in the UK stock market may further struggle to justify the purchase of expensive stocks at present. After all, even though the FTSE 100 index has made several new record highs during 2025 and currently has a price/earnings (PE) ratio of around 17.4, it is relatively straightforward to find companies with lowly earnings multiples.

High-quality stocks

However, looking ahead to 2026 and beyond, it may be worth at least considering companies with relatively high PE ratios. In some cases, they are of a higher quality than their cheaper counterparts. For example, they may have a solid balance sheet that allows them to reinvest for future growth, make acquisitions or engage in share buybacks that leads to an improving outlook for earnings per share (EPS).

Similarly, relatively expensive stocks may have a much stronger competitive position than their cheaper index peers. For example, they could have a very loyal customer base due to their ownership of strong brands that allows them to raise prices at a fast pace in the long run. This could lead to higher profit margins and a brisk pace of earnings growth.

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A strong competitive position can also provide support during periods of economic uncertainty, which is particularly relevant among more cyclical firms, since it can mean consumers cut back on other purchases before reducing their consumption of the company’s product or service.

Growth potential

Firms that have attractive future profit growth prospects over an extended time frame could also be worthy of a premium valuation vis-à-vis the wider market. Such companies may be able to maintain their high earnings multiple over an extended period, with rapid bottom-line growth leading to share price outperformance versus the wider equity market.

At present, companies that are sensitive to the undulations of the world economy could offer such an outlook. Interest rate cuts enacted in several major developed economies over recent months, including the US, UK and the eurozone, could lead to improved operating conditions for a wide range of cyclical firms in 2026 and beyond following a highly uncertain economic period.

Indeed, those companies that have significant exposure to the US, as well as emerging economies such as China, could particularly benefit from their relatively strong GDP growth outlooks. The US economy, for example, is forecast to grow by 2.1% next year, with China’s GDP growth rate expected to be 4.2%, according to the International Monetary Fund (IMF).

Both figures compare favourably to the UK’s forecast economic growth rate of 1.3%. Exposure to relatively fast-growing economies may help to justify higher earnings multiples due to the prospect of strong profit growth over the coming years.

A pragmatic approach

Clearly, it is always much more preferable to buy any stock when it trades on a low earnings multiple rather than a high PE ratio. It provides scope for capital gains from an upward rerating as investor sentiment potentially improves. A low earnings multiple may also offer a degree of support during inevitable stock market downturns, since companies that already have a low PE ratio may be subject to less severe share price declines vis-à-vis their more expensive counterparts.

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But it is often not possible to purchase high-quality companies that have attractive long-term growth outlooks at a lowly market valuation. Therefore, rather than simply discarding them because they are expensive, it may be logical for investors to consider whether they merit a premium valuation, rather than potentially focusing on cheaper, lower-quality stocks that lack the same level of earnings growth prospects.

Sound finances

Source: ShareScope on 16 December 2025. Past performance is not a guide to future performance.

For example, FTSE 100-listed InterContinental Hotels Group (LSE:IHG) currently trades on a PE ratio of 32, dropping to 27.6 on a forward basis. While this is markedly higher than the earnings multiple of the wider index, the owner of hotel chains including Holiday Inn, Kimpton and Crowne Plaza could offer a favourable risk/reward ratio for 2026 and beyond.

Crucially, it is fundamentally sound. Its latest annual results showed that while net debt rose by 22% year on year, net interest cover still amounted to 7.4. A solid financial position has enabled the firm to engage in M&A activity, notably its purchase of Ruby Hotels earlier this year for $116 million (£87 million), as well as conduct regular share buybacks over a sustained period. Indeed, it has implemented a $900 million share repurchase programme during the current year.

An upbeat growth outlook

Sound finances also enable the company to reinvest for future growth. At the time of its latest quarterly trading update, IHG had 342,000 new hotel rooms in its pipeline. This equates to 34% of its total estate, with their gradual introduction potentially acting as a significant catalyst on the company’s bottom line. Similarly, the firm is aiming to grow profit margins over the medium term by managing costs and also growing ancillary income, such as from co-branded credit cards and its loyalty scheme.

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The firm is forecast to post a 16% rise in EPS in the current year, with further growth of 13% anticipated for next year. Over the medium-to-long term, the company is aiming to deliver a 12-15% annual rise in EPS. If met, this is likely to be materially higher than the growth rate of the wider FTSE 100 index, which suggests the company could be worthy of a relatively expensive market valuation.

Additionally, IHG’s strong competitive position could mean it is currently not overvalued versus the wider stock market. Its wide range of hotel brands benefit from having a loyal customer base that provides scope for greater price increases than may otherwise be the case.

Possible threats

Clearly, the firm remains heavily dependent on the US economy. Last year, for example, it generated 57% of its revenue in the US. Given that inflation remains 100 basis points above the Federal Reserve’s 2% target, consumers remain under a degree of pressure at present. Indeed, this was evidenced in the recent weak performance from the firm’s US segment, with it recording a 1.6% fall in revenue per available room (RevPAR) in the third quarter of the year after a turbulent first half of the year.

However, the aforementioned upbeat outlook for the US economy, as well as the world economy, amid interest rate cuts and an expected moderation in inflation should provide an improved operating environment for IHG. Its status as a relatively cyclical firm means it is well placed to capitalise on an improving global economic outlook as the full effects of monetary policy easing become clear.

Risk/reward ratio

Undoubtedly, IHG is an expensive stock. In fact, it is easy to find a host of FTSE 100 firms with far lower earnings multiples at present. And if investor sentiment towards the company weakens, for example due to a less upbeat economic outlook than anticipated, a downward revision to its rating could lead to elevated share price volatility.

But with solid fundamentals and an upbeat long-term growth outlook, the company appears to be worthy of a premium market valuation. Its risk/reward ratio suggests it has investment potential in 2026 and beyond.

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