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UK under the radar
There has been a great deal of focus on the outperformance of European equities versus U.S. equities in 2025. The performance of Europe versus the U.S. was the strongest in any January for a decade.1 Yet the UK has also started 2025 more strongly than the U.S., with the FTSE 100 up over 7% year-to-date, versus a small fall for the S&P 500.2
UK earnings have been robust
Contribution to total return from equities, 2016-2024
The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. Source: BlackRock Fundamental Equities, Bloomberg, 31 December 2024. The charts shows cumulative total return attributable to earnings, re-invested dividends and Vvluation for 31 December 2015 to 31 December 2024 for the FTSE All-Share, EU Stoxx 50, and MSCI World.
The Q4 2024 earnings season was another positive one for the UK. Both sales and earnings have provided positive surprises, beating estimates by 2% and 6% respectively, and earnings are forecast to grow by 10% in 2025.3
UK equities remain cheap versus other major markets and versus their own long-term history.4 Valuations are composed of earnings and the price investors are willing to pay. Earnings have been solid, so what about the other side of the equation?
Positive signs for the UK, and portfolio diversification
We believe there are reasons for investor sentiment to shift. UK politics appears to have entered a period of stability following the years of volatility after the Brexit vote. The decreased level of uncertainty is key for investors, in our view. And amid geopolitical tensions surrounding trade tariffs, the UK offers a defensive, services-orientated market that is largely shielded from the turbulence. The FTSE 100 has the least exposure to the ups and downs of global trade versus other major markets.5 Investors worried about “US exceptionalism” may look at the UK’s cheap valuations and defensive qualities and see an opportunity to diversify.6
Fast-moving trends and solid foundations
The UK is home to world-leading companies across a broad range of sectors, providing skilled active managers with ample opportunities to build on the solid earnings growth provided by the broader index.
There are companies that are capitalizing on the AI revolution due to their vast, proprietary data sets. These include Relx and the London Stock Exchange Group. The UK’s top healthcare companies – the biggest is AstraZeneca – are also in a strong position to benefit from the use of AI, in part thanks to the depth of their data.
And there are companies in less fashionable – and cheaper – areas of the market that have continued to compound earnings growth due to what we see as smart investment decisions. These include Next and 3i within the retail sector, and Compass within the catering industry.
UK equities, in our view, offer portfolio diversification at an attractive price, a potential haven amid global trade tensions, and exposure to world-leading companies across a broad range of sectors, many of which trade on a discount to global peers.7 We believe this provides skilled stock pickers a great opportunity to deliver above-market returns.
Diversification and asset allocation may not fully protect you from market risk.
1 CNBC, Factset, February 18, 2025
2 Bloomberg, March 4, 2025
3 All earnings numbers in this report come from Goldman Sachs Investment Research, as of Feb 28, 2025. Forecasts/estimates may not come to pass
4 BlackRock Investment Institute, Feb 26, 2025.
5 Goldman Sachs, July 2024. Other markets include the S&P 500, Eursotoxx 600, DAX, TOPIX and MSCI EM.
6 UK stocks are cheaper than US or European stocks. Bloomberg, Feb. 2025
7 BlackRock Fundamental Equities analysis, Feb. 2025
