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He FTSE 100 It surpassed 8,000 points at the beginning of April. Could we see the start of a long-awaited bull run?
Well, no. At least, it seems not yet.
The Footsie took a brief look above the 8,000, didn't like what he saw, and quickly ducked back down. He is down to 7,850 points at the time of writing.
So what's wrong? After all, the outlook for our top UK stocks looks strong. They have come down a bit as estimates have been reduced. And we're still waiting for all the 2023 results to come in.
10% profit growth
But analysts predict total earnings growth for FTSE 100 shares in 2023 of close to 10%.
At the start of the year, the FTSE 100 had an overall price-to-earnings (P/E) ratio of around 11. The index has gained a little since then, but after this latest pullback, not much really. .
The average P/E over the last decade has been around 16, and that's close to Footsie's long-term average.
Assuming it gets back around that mark, and taking into account that potential 10% earnings growth, I think the FTSE 100 could easily be 30% undervalued right now.
Dividends
And then let's add the expected dividend yield. According AJ Bell's Dividend panel, the City places it at 3.9% for the year that just ended. And we see 4.2% by 2024, which is a historically strong level.
Investors can get more than that from a cash ISA right now, and that's guaranteed. But once interest rates fall, that can't last.
By the end of the year, if we get the interest rate cuts we expect, cash ISAs, bonds and bonds could look much less attractive. Could that be the stimulus for a major return to the stocks and shares market?
Cheap stocks?
As an example of how incredibly cheap I think some FTSE 100 shares are right now, let's look at Lloyds Banking Group (LSE: LLOY). Actually, for no other reason than that I have some.
Lloyds' forward dividend stands at 5.4%. And the forecast P/E for 2024 is just nine. What's more, growth forecasts for the coming years would reduce the P/E to six and raise the dividend yield to close to 7%.
Are British investors crazy for not wanting to snap up a bargain like that?
Well, the short-term risk is still there, with interest rates hurting Lloyds' mortgage business. And when they fall, we should see lower lending margins… it hurts no matter how you look at it. I think Lloyds shares could see further weakness.
Feeling
But by far the most important factor, for me at least, is British investor sentiment. While fear remains, UK share prices could well remain low.
Still, I really think we could see an increase in stock market sentiment in the second half of this year.
And if the FTSE 100 doesn't finish the year well above 8,000 points… well, we'll be able to buy cheap shares for a little longer.
