Is the FTSE 100 ‘overvalued’ at 7,600 points?

The FTSE 100 index (INDEXFTSE: UKX) enjoyed a Santa Rally in December, breaking out to a new high. Does that make it a buy or a sell?

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.

During the last few days of 2017, the FTSE 100 enjoyed a classic ‘Santa Rally’ and broke out to a new high. It trades at 7,650 points as I write.

So does the high level of the index mean that it’s overvalued at present? Is now the time to be avoiding shares, or could the index run higher in 2018? Let’s take a closer look at the current state of the FTSE 100. 

Valuation

According to Stockopedia, its trailing P/E ratio at present is 18.8. The general rule of thumb with P/E ratios is that anything under 15 is considered cheap, while anything over 15 is expensive.

While the current ratio of 18.8 indicates that the index is not in bargain territory, it is also not too far above the long-run FTSE 100 average of around 15-17. This suggests to me that the index is not terribly overvalued at present.

It’s also worth noting that when compared to other global stock markets, the FTSE 100 does look attractively valued right now. For example, the trailing P/E ratio of the US’s S&P 500 index is currently around 26. So the FTSE 100 seems cheap in comparison.

Individual valuations

Individual valuations at the top of the index don’t look excessively high either.

For example, the FTSE 100’s largest stock, HSBC Holdings, currently has a P/E of 14.2 and a dividend yield of 5%. Similarly, Royal Dutch Shell has a P/E of 15.6 and a yield of 5.5%. Those metrics look very reasonable, in my view.

In contrast, if we look at top constituents of the S&P 500, Apple currently has a P/E ratio of 19 and a yield of 1.5%, while Amazon.com has a P/E of 300 and pays no dividend.

Furthermore, around 40% of the stocks in the FTSE 100 are currently 10% or more below their 52-week highs. For example, GlaxoSmithKline is 23% off its 52-week high. National Grid is 21% below its high. Barclays has fallen 17%. Even ever-popular Unilever is 11% off its 52-week high. This suggests to me that there’s little exuberance associated with UK stocks at the moment. 

Long-term laggard

The slow long-term progress of the FTSE 100 is also something to consider. Over the last 10 years, the index has risen a little over 20%. But the S&P 500 has surged over 90%.

After almost touching 7,000 points in 1999 and 2007, the index suffered dramatic pullbacks on both occasions, losing around 50% of its value. Is it finally time for a sustained run above 7,000 points?

Risks

Realistically, no one knows exactly how the FTSE 100 will perform going forward. While its valuation doesn’t look outrageous, plenty of risks remain.

Therefore, perhaps the most sensible investing strategy right now is to ‘average in’ to the stock market at regular intervals. Invest small amounts on a monthly or quarterly basis. This will ensure that you don’t invest a lump sum at the top of the market, only to see your capital plummet in value if markets pull back.

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.

Edward Sheldon owns shares in GlaxoSmithKline and Royal Dutch Shell B. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, GlaxoSmithKline, and Unilever. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »