Where next for the FTSE 100?

Important information - investment values and income from investments can go down as well as up, so you may get back less than you invest.

Technology companies account for roughly 3% of the FTSE 100, compared with a third of the S&P 500. This is a key reason why the UK has tailed behind North America over the past decade, from both a returns and valuation perspective.

The FTSE 100’s ‘old fashioned’ status is starting to work in its favour, however. Higher interest rates have turbocharged banks after years of underperformance. Meanwhile, miners are reaping the rewards of higher gold, silver and copper prices.

• Read: What is the best way to invest in gold - ETFs or gold miners?

Another standout sector is defence, which has been boosted by higher military spending across Europe.

Chart 2: Winners and losers of 2025

^{Source: FactSet}

Last year’s winners attest to these industry trends. Fresnillo and Endeavour Mining are both gold miners, and Antofagasta is a copper miner. Meanwhile, Babcock is a defence giant following in the footsteps of fellow FTSE star Rolls-Royce.

The question for investors is whether these trends have further to run. Miners form an important part of the FTSE 100, but they are notoriously cyclical. If metal prices drop in 2026, miners will quickly feel the effect.

The geopolitical outlook will also play an important role this year. We have already seen investors in defence stocks briefly lose their nerve during peace talks between Ukraine and Russia². If global tensions ease this year, this could knock the UK’s aerospace and defence industry, which represents about 8% of the FTSE 100.

Similarly, investors will be watching to see if lower interest rates will hit the banking sector, which massively outperformed in 2025.

Panmure Gordon analyst Joachim Klement flagged that the FTSE 100’s recent outperformance is concentrated in a small number of stocks, which could increase risk. “If the rally in banks or defence stocks stalls, the FTSE 100 may quickly become an underperformer again,” he said³.

Chart 3: Rates coming down

The Bank of England is expected to reduce the base rate slightly in 2026, having made four cuts last year.

This might be bad news for banks, which can charge more for loans when rates are high, but lots of companies will be glad to see the cost of borrowing fall - particularly in the property sector.

Housebuilders such as Persimmon and Barratt Redrow have suffered since the pandemic, as high mortgage costs have weighed on demand for new homes. They are hoping that lower rates will breathe fresh life into the market.

Chart 4: Dividends incoming?

Dividends are a key component of the UK’s investment case. From a price perspective, the FTSE 100 has climbed by around 70% since the start of January 2016. If you had taken your dividends and reinvested them, however, your total returns would have risen by almost 150%⁴.

• Read more: Where to find the best dividends

It is encouraging, therefore, that analysts expect the FTSE 100’s dividend yield to rise in the coming years. In fact, analysts expect total payments to reach a record high of £86bn in 20265⁵.

HSBC is by far the biggest income payer, doling out over £13bn of dividends last year. Banking rivals Barclays and Lloyds are also in the top 10, and NatWest is nipping at their heels.

Chart 5 - Bargain basement?

No one knows for certain what will happen to dividends in 2026, or to individual sectors. There is still a big factor working in the FTSE’s favour, however: valuation.

Sentiment has improved towards UK companies recently. However, the FTSE 100 still lags the US and Europe from a price/earnings perspective. The discrepancy has become more extreme since 2021.

As investors diversify away from the US market - which is looking increasingly expensive and concentrated - there is still plenty of room for UK valuations to improve. It is also worth noting that FTSE 100 companies are very exposed to the American economy: they make about a quarter of their sales in the country. Arguably, therefore, they provide a way to buy into the US at a discount.

It is not quite this simple though. Growth is a key consideration for investors, and US stocks have been growing much faster than UK ones. When this is factored in, the valuation discrepancy between the two regions looks far less extreme - as shown by the PEG ratio.

The PEG ratio is the more sophisticated cousin of price/earnings ratio. It tells investors how expensive a stock or index is relative to how fast it is expected to grow, rather than relying entirely on a static earnings figure. The FTSE 100 has a PEG ratio of 1.7 for 2026, while the S&P 500 commands a ratio of 1.8. In other words, there’s a gap, but not a gulf.

How to invest in the FTSE 100

There are lots of ways to invest in the UK market. Those who want low fees and low fuss could look at index trackers such as the iShares Core FTSE 100 ETF.

You may prefer an active approach, however. Fidelity Special Situations Fund is one of three actively managed UK funds on Fidelity’s Select 50 list. Managed by Alex Wright and Jonathan Winton, it focuses on undervalued UK companies and is one of Tom Stevenson’s fund picks for 2026

• Read: My fund picks for 2026

Other active funds on the Select 50 include FTF ClearBridge UK Equity Income Fund and the Liontrust UK Growth Fund.

Source:

¹ Calastone.com. 06.1.26
² Reuters.com. 16.12.25
³ FT.com. 04.12.25
⁴ FactSet: 1.1.16 to 20.1.2026
⁵ AJ Bell dividend dashboard. Dec 25