Over the past 15 years, the FTSE 100 has lagged the S&P 500 badly. The reasons for this are many and well documented, including Brexit and a lack of tech sector exposure. But with the leading UK index outperforming its US counterpart in 2025, I am sensing a once-in-a-generation opportunity to capitalise on renewed investor interest in cheap UK shares.
Valuation extremes
The biggest risk for US stocks is investor complacency. Back-to-back 20% plus returns, powered predominantly by the Magnificent 7 stocks, have led many to think that such returns are the norm. But they’re not.
The forward price-to-earnings ratio of these group of seven stocks may have come down to 27 lately, but they are still priced to perfection for me.
Since the tariff-induced sell-off back in April, over 50% of the near $8trn market cap gains in the S&P 500 have come from just these seven stocks. The concentration risk to me is reminiscent of the Nifty Fifty stocks of the early 1970s. Back then a group of 50 stocks, including IBM and Procter & Gamble reached crazy valuations, which led to a decade of poor returns.
Golden era
I’m not predicting the end of the dominance of the US stock market or the collapse of the dollar. What I’m saying is that when so much of the world’s capital has been sucked into one market, then eventually investors will look for opportunities elsewhere.
With increasing levels of market volatility, I believe that investors will increasingly shun out-and-out growth stocks in favour of reliable, high-dividend payers. And, boy, is there plenty of such shares on offer among the FTSE 100.
Housebuilders
One sector that has been in the doldrums lately, but about which I’m becoming increasingly optimistic, is residential housebuilders.
Last week, as part of its spending review, the government announced a mammoth £39bn for a 10‑year affordable homes programme. This includes investing in infrastructure and land remediation to deliver new housing schemes in partnership with the private sector.
This massive cash injection comes hot on the heels of England’s National Planning Policy Framework. This sweeping document aims to remove hurdles associated with obtaining planning consent to build new houses.
The policy document places a duty on local planning authorities to set out clearly defined five-year targets for growing housing supply. In addition, in areas where there has been significant under-investment, a buffer of 20% will be added.
One stock that I foresee being a major beneficiary of these government initiatives is Taylor Wimpey. (LSE: TW.). As at the end of last year, it had 26,500 plots for first principle planning already in the system.
Build cost inflation and falling average selling prices have pushed the stock down 18% over the past year. But this has pushed the dividend yield up to a market-beating 8%.
Despite the downturn, the company has maintained tight control of the balance sheet. Net cash currently stands at £565m. It’s guiding for much better trading in 2025 and is gearing up for a pivot toward a growth orientated stance.
With mortgage rates looking set to decline over the next couple of years, I fully expect renewed investor interest in the stock. That is why it’s on my watchlist to buy.
