The UK stock market is proving less volatile than the US market, as the UK has less exposure to the areas that have been most volatile, notably technology stocks, Russ Mould, investment director at AJ Bell, has said.
While the FTSE 100 index has done less well than America’s S&P 500, the UK benchmark also trades on a lower valuation than its US counterpart and expectations are less bullish
Mould noted that the much-maligned UK stock market was having a less turbulent summer of it than that of America, and ultimately that came down to valuation and relative levels of expectation.
“Even if investors may view the headline FTSE 100’s lesser decline relative to the US S&P 500 as cold comfort, it does back up the old saying that valuation will never tell investors exactly when to buy or sell in the near term, but it will ultimately help to set floors and ceilings for asset prices over the long term - even if they will tend to overshoot both ways."
According to Mould, one possible explanation for the FTSE 100’s greater resilience is that the US market has done "so much better" – so its valuation is higher and expectations are higher.
He added: “Over the last five years, the S&P 500 has risen by 82 per cent, while the FTSE 100 has eked out a 12 per cent advance over the same time period. As a result, this may leave it more exposed on the downside in the event of any unexpected shocks.
“The UK benchmark trades on a lower valuation multiple – at just 12.5 times forward earnings for 2024 and 11.5 times for 2025 compared to the S&P 500’s 23.3 times and 19.9 times, based on consensus analysts’ forecasts and S&P Global Research.
“Meanwhile, analysts are looking for a second straight drop in aggregate earnings from the FTSE 100 in 2024, of 9 per cent, with a modest 8 per cent rebound in 2025, to leave next year’s predicted net income figure at £183bn, a fraction below 2023’s outturn of £185bn. Some investors may see that as reasonable given the uncertain global economic outlook.
“In the US, however, S&P Global research suggests US analysts are looking for 11 per cent earnings growth in 2024 and 17 in 2025 – and that is on top of 8 per cent growth in 2023."
There are good reasons, according to Mould, why the trajectories could be so different. America may still be basking in the fiscal stimulus provided by the Biden administrations CHIPS and Inflation Reduction Acts, benefitting from increased onshoring and also the S&P 500’s much greater exposure to areas such as technology, where hopes for an AI-inspired spending and productivity boom continue to run high.
But this also increases the risk of downside in US equities should any unexpected disappointment creep up and sandbag those earnings forecasts – either because the economy slows down; AI fails to deliver a satisfactory return on the initial huge outlay made by corporations who then pause spending here, or even retrench; or there is an exogenous shock, Mould warned.
