The stock market has presented a few surprises over the last few years. And recently, despite dire economic forecasts, we saw UK stocks go on on bull run that appears to be petering out.
So what’s next for the FTSE 100? Can it keep rising?
Is 9,000 possible?
UK stocks have been rallying since Rishi Sunak took over from Liz Truss. There’s no doubt that Truss and her chancellor’s plan to manage an ailing economy spooked markets. In October, the index fell as low as 6,707.
The fall highlighted how vulnerable the stock market was, at that point in time, to even higher rates owing to unconventional economic governance. In my view, we’ve gone from one extreme to the another. From a kamikaze mini-budget under Truss, to sound economic governance under Sunak. And the markets have responded accordingly.
So where next?
Well, several forecast show the FTSE 100 continuing its gains. The Economic Forecasting Agency suggest that the index could reach 9,275 in July. That’s the upper end of its forecast though. It’s more likely to close at 8,750, according to the agency.
Earnings didn’t spook the market
Earnings data is naturally an important indicator for the general direction of markets. Right now, we’re coming to the end of earnings season, and this time there weren’t many downside surprises.
Some analysts have suggested that bank earnings disappointed, but I don’t think that’s the case. There was nothing to spook markets, or change investor sentiment. While Barclays missed estimates by less than 3%, HSBC surged.
There was even good news for embattled engineering giant Rolls-Royce. The firm beat estimates by some distance, noting an improvement in all business segments.
What could move stocks?
Moving forward, we need to look at macroeconomics. And right now, there are several positive commentaries. Firstly, this week we had Secretary of the Treasury Janet Yellen saying that the global economy appeared to be in a much stronger place than forecasts had suggested.
This is important for the FTSE 100 because of its weighting towards mining and energy stocks. A strong global economy tends to mean higher demand for resources, pushing these sectors upwards.
The index may also be boosted by an improving economic outlook in the UK and a new agreement on Brexit. A deal on the Northern Ireland protocol would unleash tens of billions of pounds in business investment for the UK, according to reports this week.
Investment in the UK has been very low since the Brexit vote. I think everyone in government is aware something needs to change — hopefully the Eurosceptics do too. The UK economy is roughly 5% smaller than it would have been inside the EU and output losses amount to £100bn a year.
However, there’s a plethora of risks that could derail markets. There’s obviously concern about an escalating war in Ukraine and geopolitical tensions with China. But we’ve also got to keep an eye on US debt — the US could hit the debt ceiling as soon as June — in addition to Japanese bonds. What the Bank of Japan does next could really move markets.
