FTSE 100 OVERVIEW AND US MARKET COMPARISON

What Is the FTSE 100 Index?

The FTSE 100, often referred to as the “Footsie”, is a benchmark stock index representing the 100 largest companies listed on the London Stock Exchange (LSE) by market capitalisation. The index was launched on 3 January 1984 and is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.

The FTSE 100 serves as the primary indicator of the financial health and performance of large UK-listed corporations. While the constituent companies are listed in the UK, many operate globally and derive the majority of their revenues from international markets.

Key Components of the FTSE 100

The composition of the FTSE 100 is reviewed quarterly—in March, June, September, and December—to ensure it reflects the current largest UK companies by market cap. Entry and exit are based purely on market value, and the process ensures that the index remains a representation of the top 100 firms on the LSE.

The FTSE 100 includes companies across diverse sectors, though it is notably heavyweight in certain industries. Key sectors and examples of representative companies include:

• Energy: BP, Shell
• Financials: HSBC, Barclays, Lloyds
• Consumer Goods: Unilever, Diageo
• Healthcare: AstraZeneca, GSK
• Mining: Rio Tinto, Anglo American

FTSE 100 Weighting and Methodology

The FTSE 100 is a capitalisation-weighted index, meaning that companies with larger market capitalisations have a greater impact on the index’s movement. Market cap is calculated as the share price multiplied by the number of outstanding shares. To prevent one company from dominating, capping rules may be applied under certain conditions.

Currency and Global Exposure

Since many FTSE 100 constituents earn a substantial proportion of their revenues from overseas, the index is significantly affected by fluctuations in the value of the British pound. A weaker pound often leads to gains in the FTSE 100, as foreign earnings translate into higher sterling earnings for multinational firms.

Who Tracks the FTSE 100?

The FTSE 100 is widely followed by institutional and individual investors as a yardstick for the performance of UK-listed large-cap equities. A variety of investment products, including exchange-traded funds (ETFs) and index funds, are based on the FTSE 100, allowing passive exposure to the UK market.

FTSE 100 vs. Other FTSE Indices

While the FTSE 100 garners the most attention, it is part of a broader suite of indices. These include:

• FTSE 250: Mid-cap UK companies
• FTSE 350: Combination of FTSE 100 and FTSE 250
• FTSE All-Share: Represents over 600 companies listed on the LSE

Together, these indices provide a more comprehensive view of the broader UK stock market.

How Does the FTSE 100 Differ from US Indices?

Though the FTSE 100 is often compared to major US indices like the S&P 500 and the Nasdaq Composite, several distinctions make its behaviour and performance diverge over time. These differences arise primarily from variations in sector composition, economic exposure, currency effects, and market sentiment.

Sector Composition

The sectoral makeup is a fundamental reason why the FTSE 100 behaves differently from its US counterparts. The FTSE 100 is heavily weighted towards “old economy” sectors, including:

• Energy
• Mining and Commodities
• Banking and Financial Services
• Consumer Staples

By contrast, US indices—especially the Nasdaq—are dominated by technology companies such as Apple, Microsoft, Alphabet (Google), Amazon, and Meta.

As a result, the FTSE 100 may underperform during tech-driven bull markets and outperform during periods where commodities, energy, or value stocks lead the way.

Global Revenue Exposure

Seventy percent or more of the FTSE 100 companies’ revenues often come from non-UK sources. This is significantly different from the S&P 500, which derives approximately 60% of revenue from the US domestic market. This global revenue footprint makes the FTSE 100 extremely sensitive to international demand, trade dynamics, and currency movements.

Currency Sensitivity

Currency fluctuation is another differential factor. Since many FTSE 100 firms report earnings in foreign currencies but trade in GBP, foreign exchange movements have a pronounced impact. For example, a depreciating pound often boosts FTSE 100 performance, while it can have a more muted or inverse effect on the S&P 500.

Valuation Differences

Historically, the FTSE 100 has traded at lower price-to-earnings (P/E) ratios compared to US indices, making it somewhat of a value play. This valuation discount can attract value-focused investors and reflects structural differences in growth expectations between UK and US equities.

Dividend Yields

The FTSE 100 generally offers higher dividend yields compared to US indices. UK firms, particularly in energy, mining, and financials, tend to distribute a higher portion of earnings to shareholders. This makes the FTSE 100 an appealing option for income-oriented investors.

Monetary Policy and Interest Rates

The index is also influenced by the Bank of England's monetary policy, inflation forecasts, and interest rate decisions. These can diverge significantly from US Federal Reserve stances, impacting equity market performance in different directions.

Investor Base and Sentiment

Cultural and behavioural differences among investors in the UK and US also play a role. UK markets tend to attract more conservative capital allocations and have a long-standing culture of income investing. US markets, by contrast, are typically driven more by growth narratives and momentum-based investment strategies.

Why Does the FTSE 100 Move Differently?

The divergence in behaviour between the FTSE 100 and US equivalents is not accidental. It is shaped by historical, structural, and macroeconomic factors that govern investor expectations, sectoral performance, and market valuations.

Exposure to Defensive Sectors

FTSE 100’s heavy concentration in defensive sectors—such as consumer staples, utilities, pharmaceuticals, and commodity producers—means it is less sensitive to the economic cycle and more likely to hold up during downturns. US indices, with their technology and growth orientation, may rally faster during recoveries but suffer deeper declines during corrections.

Brexit and Domestic Challenges

UK-specific political and economic risks, especially following Brexit, have introduced a layer of uncertainty that affects valuations and investor confidence. These factors can suppress the performance of UK-listed firms and alter risk perceptions even when global markets are bullish.

Inflation and Commodity Sensitivity

The FTSE 100 often benefits during inflationary periods or commodity booms. Given its reliance on energy, mining, and basic materials, high commodity prices tend to raise earnings forecasts for many index constituents. In contrast, high inflation can negatively impact tech-dominated US indices by raising discount rates for future earnings.

Interest Rate Sensitivity

Income-generating sectors dominate the FTSE 100, and this means interest rates have a significant role in determining equity prices. Rising interest rates typically act as a headwind for these companies by increasing their debt servicing costs and reducing the attractiveness of dividend returns relative to bond yields.

Long-Term Performance Patterns

Over the last decade, the FTSE 100 has underperformed major US indices, largely due to its lack of exposure to high-growth technology firms. However, during periods of global macro uncertainty or high inflation, the index can outperform US markets due to its value tilt and exposure to commodities and multinationals.

Global vs Domestic Earnings Impact

Because of its international revenue base, the FTSE 100 acts as a quasi-global index rather than a pure reflection of the British economy. This distinction means that global financial events—ranging from geopolitical crises to shifts in international trade—can drive the index in seemingly counter-intuitive ways relative to local economic headlines.

Investor Perceptions and ESG Trends

Perceptions of UK corporate governance, ESG standards, and sustainability narratives also influence investor positioning. The recent push toward decarbonisation and tech innovation has led global investors to disproportionately favour US and European growth indices, sidelining UK equities despite their solid fundamentals.

Conclusion: Navigating the FTSE 100’s Nuances

Ultimately, the FTSE 100 is a unique index that reflects the UK’s industrial past, global business ties, and current macroeconomic context. Understanding why and how it diverges from US stock indices can provide investors with strategic insights into global diversification, risk management, and return expectations.

Whether used as a core equity component or a tactical allocation, the FTSE 100 remains a critical tool for anyone navigating international equity markets.