So, its finally happened. The S&P 500 has hit 2,000 points for the first time in its history. Meanwhile, the FTSE 100 has yet to even break its 2000 and 2007 highs, with the UKs leading share index apparently unable to break the 7,000 point barrier. However, heres why it could happen a lot sooner than you think.
A lot is made of the FTSE 100s current valuation, with many investment commentators saying that the FTSE 100 is due a large correction as a result of it having risen since its 2009 lows. However, the FTSE 100 does not appear to be overvalued relative to its own history, nor when compared to other major indices.
For example, the FTSE 100 currently trades on a price to earnings ratio (P/E) of 13.7. This is well below the S&P 500s P/E of 19.2. In fact, the S&P 500s P/E is now 40% higher than the FTSE 100s, which means that if the FTSE 100 were to trade at an equal P/E to its larger cousin across the pond, it would currently stand at a whopping 9,500 points.
Furthermore, a P/E of 13.7 is not particularly high by the FTSE 100s historical standards. It has been much, much higher in the past before a large correction has taken place. Certainly, the FTSE 100 may no longer be dirt cheap, but its not expensive, either.
A Psychological Barrier
One reason why many UK investors currently think the FTSE 100 is expensive could be history. The FTSE 100 has been at its current level of 6775 points many times before and has never pushed upwards by more than a couple of hundred points. Therefore, many investors may become wary of buying at such levels, which is making the FTSE 100 stall when it comes within 5% of the 7,000 barrier.
However, earnings at FTSE 100 companies are growing each year and, as time goes by, 7,000 becomes a relatively lower level (in terms of the indexs fair value). Furthermore, with the FTSE 100 currently yielding around 3.5%, it easily beats the yield on bonds and, with interest rates set to commence their long, upward ascent, demand for shares could pick up significantly moving forward.
Clearly, there remain a number of companies that are undervalued within the FTSE 100. Indeed, these 5 companies are prime examples of stocks with bright futures that are trading at very attractive prices.
In fact, we’ve written a free and without obligation guide on the 5 stocks that we think could push the FTSE 100 beyond 7,000 points. In doing so, they could make a positive contribution to your portfolio in 2014 and beyond.
You can find out more about the 5 companies by clicking here – it’s completely free and without any further obligation to do so.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.