With the FTSE 100having delivered a flat performance during the course of 2014, its unsurprising that many investors are questioning the future potential of the index.
After all, there are a number of challenges on the horizon that could easily knock the FTSE 100 back. However, there are also reasons to be optimistic about the future prospects of the UKs leading share index.
Over the medium to long term, though, which price level will the FTSE 100 reach first: 8,000, or 5,000?
There are a number of threats facing the FTSE 100 at the present time. A slowdown in Chinese growth is affecting Asia-focused banks and luxury goods producers, while a low oil price is hurting the top and bottom lines of oil stocks. In addition, investors are being rather cautious at the present time due to the continued risk posed by Ebola, the threat of further Russian sanctions, while the end of the US Feds monthly asset repurchase programme is keeping many investors on the sidelines as they wait and see how the worlds biggest economy responds to coming off economic life support.
However, perhaps the threat that has the potential to do the most damage to the greatest number of companies in the shortest space of time is weakness in the Eurozone. Indeed, it shows how bad the situation is in the region when its biggest economy, Germany, only narrowly avoided going back into recession recently.
Growth, it seems, is off the Eurozone agenda and a fall into recession and/or deflation could wreak havoc for many of the FTSE 100s constituents (for whom Europe is a major market), as well as knocking investor confidence, too. As such, further weakness in the Eurozone could be the catalyst to push the FTSE 100 to 5,000 points.
Despite the numerous challenges facing the FTSE 100 at the present time, there are reasons to cheer. Firstly, the ECB seems to be as well placed as it ever has been to stimulate the Eurozone in the same way as its UK and US counterparts have already done with their economies. QE should help to boost the regions growth figures and stave off deflation. And, with expectations surrounding the Eurozone being so low, any improvement could lift market sentiment significantly.
In addition, the FTSE 100 remains relatively cheap. It trades at roughly the same price level as it did fourteen years ago and, since then, company earnings have risen considerably. This means that it trades on a price to earnings (P/E) ratio of just 15.4, which is significantly below the S&P 500s P/E ratio of 19.1 and shows that there is still considerable upside potential. Indeed, were the FTSE 100 to trade on the same P/E ratio as the S&P 500, it would be standing at 8,320.
So, while the FTSE 100 is roughly in between the two levels of 5,000 points and 8,000 points, there are enough positive and negative catalysts to push the FTSE 100 to either point over the medium term.
As for which one is most likely to be hit first, the FTSE 100 has remained remarkably resilient (on the whole) in spite of the challenges outlined. And, with it still being good value and there being a potential fix for the Eurozone in the pipeline, investor sentiment could increase significantly in 2015 and beyond. As a result, 8,000 points seems very achievable and, if the FTSE 100 does dip in the meantime, it could prove to be a tremendous buying opportunity for longer term investors.
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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.