What would help the FTSE 100 get above 7,000 and keep going

Russ Mould
15 April 2021

“At face value, it does seem odd that the FTSE 100 is trading above its pre-pandemic levels, even if the number of daily new COVID-19 cases are back to where they were last March and last September and the vaccination programme continues apace,” says AJ Bell Investment Director Russ Mould. “But it does make sense if you think that the consensus earnings forecasts for the index are going to be accurate, or even prove too low. An aggregate of the estimates made for each member of the index suggests that the FTSE 100’s total pre-tax profit will be £178 billion in 2021 and £205 billion in 2022.

“Those figures exceed the £166 billion made in 2019, before the pandemic hit home. Moreover, if the 2022 forecast is attained, then that would represent a new all-time high for annual earnings, surpassing the £199 billion made in 2011.

 
Source: Company accounts, consensus analysts’ forecasts, Marketscreener

“In this context, it is not too hard to see why the FTSE 100 is trading where it is, or even make a case for further gains, since the index trades below its May 2018 zenith of 7,779 even though record profits are expected for 2022.

“However, the economic outlook is still uncertain, the effects upon the behaviour of corporations and consumers alike are yet to reveal themselves and other parts of the globe are less advanced in their race to inoculate their populations.

“Investors must therefore decide whether the forecasts are reliable, too optimistic or too pessimistic and what must happen for analysts to be off-beam (which they usually are, owing to the understandable lack of a crystal ball).

“One way in which investors can do this is to parse the FTSE 100’s earnings mix and see what the key swing factors are. 

“Roughly 60% of forecast profits come from just three sectors: mining (now the single biggest earner), financials and oil and gas.

Percentage of FTSE 100 pre-tax profits

 

2021 E

2022 E

Mining

28.5%

21.4%

Financials

21.6%

22.8%

Consumer Staples

15.6%

15.0%

Oil & Gas

10.2%

12.5%

Industrial goods & services

7.9%

8.1%

Health Care

6.1%

7.1%

Consumer Discretionary

3.5%

6.2%

Telecoms

2.9%

2.9%

Utilities

2.5%

2.4%

Technology

0.6%

0.7%

Real estate

0.5%

0.9%

Source: Consensus analysts’ forecasts, Marketscreener

“In some ways, this makes it relatively easy for investors to judge the upside and downside potential.

“In crude terms, the stronger the economic recovery the better, so far as the FTSE 100 is concerned as the index’s key industries offer huge gearing into GDP growth. The opposite also applies. A weak recovery (or an unexpected double-dip) would be potentially a nasty surprise.

“A breakdown of forecast earnings growth makes this picture clearer still. Analysts think that the FTSE 100’s aggregate pre-tax profit will rise by £75.1 billion this year and by a further £27.1 billion in 2022. 

Forecast growth in pre-tax profit (£ billion)

 

2021 E

2022 E

Oil & Gas

27.5

7.5

Mining

22.8

(6.7)

Consumer Discretionary

8.2

6.3

Financials

6.9

8.3

Industrial goods & services

5.7

2.6

Consumer Staples

3.0

2.9

Real Estate

2.0

0.8

Utilities

0.6

0.5

Telecoms

0.3

0.7

Technology

0.1

0.4

Health Care

(1.8)

3.6

 

75.1

27.1

Source: Consensus analysts’ forecasts, Marketscreener

Miners and oils are expected to generate two-thirds of that between them in 2021. Oils, consumer discretionary and financials are forecast to provide four-fifths of the expected profit uplift in 2022.

Forecast percentage contribution to FTSE 100 pre-tax profit growth

 

2021 E

2022 E

Oil & Gas

36.6%

27.8%

Mining

30.4%

(24.9%)

Consumer Discretionary

10.9%

23.4%

Financials

9.1%

30.8%

Industrial goods & services

7.5%

9.7%

Consumer Staples

3.9%

10.8%

Real Estate

2.6%

3.0%

Utilities

0.8%

1.9%

Telecoms

0.4%

2.5%

Technology

0.2%

1.5%

Health Care

(2.5%)

13.4%

Source: Consensus analysts’ forecasts, Marketscreener

“There are more factors at work then just earnings – if central banks keep conjuring money out of thin air and Governments keep spending it, investors may decide they would rather own paper claims on real assets (or just real assets) rather than paper money, for example. 

“But strong earnings momentum is usually a helpful sign and earnings forecasts for 2021 have edged up since last summer.

 
Source: Analysts' consensus forecasts, Sharecast, Marketscreener

“Rising commodity prices and steepening yield curves would help to give aggregate earnings a boost, given how they would help the miners, oils and banks respectively and could therefore be a good sign. Conversely, falling raw material prices and flattening yield curves would not. 

“Investors who buy into the narrative that inflation is coming, after being largely dormant for 40 years, may therefore feel right at home in the UK. Those who still fear debt-ridden deflation may be tempted to steer clear and seek their fortunes elsewhere.”

Russ Mould
Investment Director

Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

Contact details

Mobile: 07710 356 331
Email: russ.mould@ajbell.co.uk

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