The FTSE 100 hit a new record high above 9,000 points during the week, bringing its year-to-date gains close to 10%, even though it later dipped slightly to take it back below that level.
It was an impressive rally considering it was around 8,000 last Christmas. So at 8,992 points as of Friday’s (18 July) close, is it overvalued. Might it even reach 10,000 points in 2025?
With the average price-to-earnings (P/E) ratio of the UK market edging close to 20, I’m cautious. But I’m also optimistic and see bargains out there.
The bigger picture
Macroeconomic factors could have a say in the coming months. On the positive side, inflation continues to ease across major economies, raising hopes that interest rates will soon begin a steady decline. Lower borrowing costs would be a tailwind for most businesses, particularly those reliant on financing like housebuilders and retailers.
Meanwhile, the UK economy has proved more resilient than many expected, narrowly dodging a technical recession. Consumer confidence is recovering and corporate earnings have generally been impressive.
But plenty of risks remain.
Rising US-China tensions and new American tariffs could hurt export-focused companies. Rising inflation might also force central banks to hold rates higher for longer, squeezing growth. And geopolitical flare-ups that could disrupt supply chains or send energy prices soaring.
So what’s driving the rally?
Much of the FTSE 100’s push above 9,000 has been fuelled by standout performances in mining, defence and aerospace. Silver miner Fresnillo is up nearly 130% this year on the back of soaring precious metal prices and Babcock has more than doubled amid rising defence spending across Europe.
Meanwhile, Rolls-Royce continues to fly, with its aerospace business benefitting from recovering travel demand and a strong order backlog.
Could these sectors keep the FTSE 100 climbing? Possibly. Defence budgets are unlikely to shrink any time soon given global tensions, while precious metals could stay in demand as investors hedge against uncertainty.
But while more growth is certainly possible, I’m more interested in the market’s income potential.
Aiming for sustainable income
Among the high growth blue-chips, I’ve unearthed some undervalued dividend gems.
One that caught my attention this week is Admiral Group (LSE: ADM). The insurer isn’t a flashy growth play, but I think it’s worth considering. It has a clean balance sheet and positive revenue and earnings.
Currently, it offers a chunky 5.9% dividend yield, with a payout ratio of 88.6%. Impressively, it’s been paying dividends for 20 straight years, showing remarkable consistency through market cycles.
As an insurer, it’s at risk from economic downturns, rising claims costs and strict UK regulation that can threaten margins. Its reliance on investment returns also adds volatility, meaning profits may be less stable than its strong track record implies.
But its valuation is comparatively low in the sector. Its P/E ratio sits at 15 and it has a strikingly low price-to-earnings growth (PEG) ratio of 0.16 — suggesting the shares are cheap relative to expected earnings expansion.
Looking ahead
Ultimately, the FTSE 100 could hit 10,000 or slide back depending on how global events play out. Either way, I prefer to keep my portfolio anchored in high-quality, income-generating shares.
They may not always steal the headlines, but for building long-term wealth, I find their combination of steady growth and dividends hard to beat.
