Why does the FTSE 100 constantly lag the S&P 500?

Here’s why the S&P 500 (INDEXSP:.INX) has been a much better place to invest than the FTSE 100 (INDEXFTSE:UKX).

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In the last decade, the FTSE 100 has risen by 3% and this has left many investors feeling somewhat disappointed with the performance of their portfolios. Clearly, the last 10 years have included a number of challenging economic events, including the credit crunch that caused a significant deterioration in investor sentiment in the FTSE 100, as well as in global stock markets.

Furthermore, the FTSE 100 has had to deal with the recent commodity crisis that has severely hurt the share prices of a number of resources companies. And with the outlook for China and the global economy being somewhat uncertain, it’s perhaps little wonder that the FTSE 100 has recorded such lacklustre performance.

However, the FTSE 100’s performance in the last decade becomes much harder to reconcile when the capital gains of the S&P 500 are taken into account. The S&P 500 is approximately five times bigger than the FTSE 100, but unlike the Dow Jones it’s weighted by market cap, which makes it a better comparator to the FTSE 100.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Outperformer

The S&P 500 has risen by 54% during the last 10 years and yet has had to endure the exact same challenges as the FTSE 100. The US economy was hit extremely hard by the credit crunch and while it’s now on the road to recovery, it has also been hurt lately by the Federal Reserve’s decision to begin raising interest rates.

Despite this, it has outperformed the FTSE 100 by over 50% in the last 10 years, with the story being the same when looking back even further to when the FTSE 100 was born. Since 1984, the S&P 500 has beaten the UK’s leading index by a whopping 682%. This means that £1,000 invested in the S&P 500 in 1984 is now worth £12,400 while the same investment in the FTSE 100 is worth £5,580.

A key reason for the S&P 500’s outperformance of the FTSE 100 is its valuation. The US stock market is simply much more expensive than the FTSE 100. For example, the S&P 500 has a price-to-earnings (P/E) ratio of 23.8 while the FTSE 100’s P/E ratio stands at just 13.2. If the FTSE 100 was to have the same P/E ratio as the S&P 500 then it would be trading at over 11,000 points and its historic returns would have been much closer to those of its US peer.

Further evidence of the FTSE 100’s low valuation can been seen in its yield, which currently stands at around 4%. The S&P 500’s yield is currently just 2.2% and if the FTSE 100 was to have the same yield as the S&P 500 then it would be trading at just over 11,100 points. As a result of this, the FTSE 100 may have been a worse place to invest in the past, but could prove to be a far superior investment in the long run.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Dividend Shares

Of the 20 highest-yielding FTSE 100 stocks, this is my top pick

This FTSE 100 stock currently offers a yield of 6.4%. But Edward Sheldon believes it’s capable of providing share price…

Read more »

Investing Articles

Could Tesla’s share price jump over the next 12 months? These analysts think so!

Tesla's share price has fallen by almost a third since 1 January. But optimism is high that Elon Musk's company…

Read more »

Investing Articles

I asked ChatGPT where the FTSE 100 will be in 6 months: here’s what it said…

Let’s be realistic, ChatGPT can’t predict the future. But it did do a good job of compiling data from brokerages…

Read more »

Investing Articles

Could the Rolls-Royce share price hit £10?

The Rolls-Royce share price has taken most analysts by surprise with almost everything going right for the British engineering giant.

Read more »

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »