What is next for FTSE 100?

The FTSE 100 is currently at 8,119.10, reflecting a 0.42% overnight gain. UK bond yields have risen more than other markets as investors adjusted their expectations for rate cuts from the Bank of England due to higher-than-expected inflation. 

As we move into 2025 in the next few weeks, let's explore the FTSE 100 predictions for the upcoming year.

Top FTSE100 predictions for 2025 

An upgraded growth is forecasted by Goldman Sachs

Goldman Sachs has upgraded its growth forecast for the UK following the Labour Party's victory in the general election. In a note released on Friday, the investment bank predicted a slight boost to demand growth from Labour’s fiscal policies, raising its 2025 and 2026 UK GDP forecasts by 0.1 percentage points to 1.6% and 1.5%, respectively.

Goldman Sachs highlighted several potential positive effects, including reforms to the planning system that could stimulate house building and productivity, increased public sector investment boosting potential output, and closer trade ties with the EU that might reduce some Brexit-related costs.

In reaction to the election results, the FTSE 100 was up 0.29% by mid-morning, while the FTSE 350 household goods and home construction index surged 3.81%. Key housing stocks like Persimmon, Taylor Wimpey, and Barratt Developments saw significant gains and are predicted to continue on the bullish trend. 

Two important components of FTSE100 could crash 

The FTSE 100 could face a significant downturn, with key companies like Barclays and Shell grappling with various challenges. Here's a closer look at the risks they face -

Barclays

Barclays may struggle due to its heavy reliance on the UK market, which accounts for around 60% of its gains. Weak loan growth and rising credit impairments pose significant risks. 

Additionally, falling interest rates could pressure net interest margins (NIMs), already strained by competition from challenger banks. There's also concern about potential penalties related to mis-sold car finance, which could result in hefty fines. Given these ongoing risks, Barclays' 66% share price surge in 2024 raises concerns of a potential correction.

Shell

Shell faces challenges from a struggling Chinese economy and potential trade tariffs under President Trump. The oil sector's outlook has worsened, with the International Energy Agency (IEA) forecasting oversupply in 2025. 

Shell's stock has performed better than BP's, but the company's future is uncertain due to weak global economic conditions and the growing adoption of green energy. While a strong financial position and buybacks offer some hope, Shell may face difficulties in 2025 unless oil prices rise due to unforeseen global events or Middle East instability.

A possible double-digit growth 

The optimistic projections for the UK economy, including the expected reduction in interest rates, are likely to positively impact the FTSE 100. 

With rates potentially dropping to 3.75% in 2025, the lower cost of debt could alleviate pressure on companies' balance sheets, improve profitability, and spur economic growth. This could lead to higher corporate earnings, particularly for businesses with significant exposure to the UK domestic market.

As analysts remain bullish for 2025, the FTSE 100 could benefit from increased investor confidence, leading to potential capital inflows. The expected 18.6% gain in the index and dividend yields may make UK stocks more attractive to domestic and international investors. 

However, the current weak demand and Howden's subdued growth outlook suggest that the road to recovery may not be without challenges. Market volatility could still pose risks to the index in the short term. In the longer term, if economic conditions improve as expected, the FTSE 100 could see significant upward movement.

Analysts predict Taylor Wimpey could soar

Taylor Wimpey's share price has dropped recently, largely due to concerns about the impact of October's Budget on housing demand. 

However, analysts expect the builder's earnings to rebound by 27% in 2025 after a 12% decline this year, making it an attractive investment at current prices of 141p per share. The company's price-to-earnings growth (PEG) ratio is a low 0.5, and it offers a generous 6.8% dividend yield. 

Despite challenges like the end of stamp duty relief, Taylor Wimpey stands to gain from the government's plans to boost the housing supply, supported by its strong land bank and financial position.

7% dividend growth, says AJ Bell

AJ Bell's latest Dividend Dashboard report reveals that FTSE 100 dividend forecasts for 2024 and 2025 remain steady. In 2024, they will grow slightly by 1% to £78.6 billion, followed by a 7% increase to £83.9 billion in 2025. 

Despite not reaching the 2018 record of £85.2 billion, FTSE 100 companies have announced £49.9 billion in share buybacks for 2024, plus £3 billion in special dividends from HSBC. 

With £11 billion in dividends from the FTSE 250 and £47.2 billion from takeovers, the FTSE 350 offers a total of £189.7 billion in cash returns, yielding 7.7%. This compares favorably to the Bank of England base rate (5%) and inflation (2.2%). 

AJ Bell's Russ Mould notes that while market growth has been slow, the FTSE 100's stability, supported by low inflation and potential interest rate cuts, remains a strong factor for investors. However, uncertainties about the US economy and global conditions could impact future performance.

Small caps could take over FTSE100

As per Octopus’ report, small and mid-cap companies are expected to outperform the FTSE 100 in dividend yields by 2025, with their dividend cover forecast to surpass the FTSE 100 for the first time in five years. 

The FTSE 100's total cash dividends remain 20% below pre-COVID levels, with little growth anticipated. In contrast, the FTSE Small Cap and FTSE 250 ex-IT indices are projected to yield higher dividends in 2025, marking a decade-long shift. 

While the FTSE 100’s dividend growth is expected to be just 22% over the next decade, FTSE AIM dividends are forecast to grow by over 82%.

What to look out for in FTSE100 moving forward

The FTSE 100 is expected to gradually recover in 2025, potentially rising to 8,500-8,800 by year-end. Dividend growth is projected at 7%, making it attractive for investors. However, challenges like global economic risks and market volatility may dampen short-term performance. Smaller UK stocks are forecasted to outperform in dividend yields, highlighting the gains of a multi-cap approach for diversification.