The FTSE 100's Resilience Amid UK-US Macroeconomic Divergence: A Pre-Fed Decision Analysis

The FTSE 100's recent performance has defied expectations, hitting a record high of 9,000 in 2025 despite the UK's economic stagnation and persistent inflationUK GDP Stalls - ADM Investor Services^[3]. This resilience contrasts sharply with the US economy's mixed signals ahead of the Federal Reserve's September 17 decision. As macroeconomic divergence between the two economies widens, investors must assess how divergent policy paths and structural trends will shape equity markets in the coming months.

UK: A Tale of Resilience Amid Stagnation

The UK's economy has shown little growth in 2025, with July's GDP data revealing no expansionUK GDP Stalls - ADM Investor Services^[3]. Industrial and manufacturing sectors have contracted, yet the FTSE 100 has surged, driven by strong performances in banking and consumer staples. This disconnect between macroeconomic fundamentals and equity markets reflects a unique dynamic: UK companies are increasingly insulated from domestic economic weakness. For instance, Barclays and Standard Chartered have benefited from global operations and currency tailwinds, while Tesco's supply chain efficiencies have mitigated inflationary pressuresThe Macroeconomic Policy Outlook: Q3 2025^[2].

The Bank of England faces a dilemma. With CPI at 4% in September 2025UK GDP Stalls - ADM Investor Services^[3], inflation remains stubbornly above its 2% target. However, the FTSE 100's outperformance—despite a savings rate of 10.9% (compared to the US's 4.5%)—suggests cautious consumer behavior is not translating into corporate underperformanceUK stock market review – FTSE 100 hits new highs despite economic wobbles^[1]. Smaller UK companies have even outpaced large-cap peers, with the FTSE Small Cap index rising 13.10% year-to-dateUK stock market review – FTSE 100 hits new highs despite economic wobbles^[1]. This divergence hints at structural shifts, such as a rebalancing toward export-oriented sectors and a focus on cost discipline.

US: Growth, Inflation, and the Fed's Tightrope

The US economy, by contrast, has shown resilience in Q2 2025, with real GDP growing at a 3.3% annual rateUK stock market review – FTSE 100 hits new highs despite economic wobbles^[1]. This rebound from a Q1 contraction of 0.5% was fueled by a 30.3% drop in importsUK stock market review – FTSE 100 hits new highs despite economic wobbles^[1], which offset weaker exports and trade policy uncertainties. However, the Federal Reserve faces a complex calculus. While inflation has eased to 2.9% year-over-yearUK GDP Stalls - ADM Investor Services^[3], it remains above the 2% target, and the labor market has softened, with job growth falling short of expectationsFed interest rate decision preview - CNBC^[4].

The Fed's September decision is now a near-certainty for a 25 basis point rate cut, with markets pricing in a 90% probabilityFed interest rate decision preview - CNBC^[4]. Yet, internal divisions within the Federal Open Market Committee (FOMC) suggest further uncertainty. Some members advocate for larger cuts, influenced by political pressures from President Donald Trump and concerns over a potential recessionFed interest rate decision preview - CNBC^[4]. However, Morgan Stanley analysts caution that robust GDP growth and persistent inflation could delay additional cuts beyond OctoberFed Rate Cut 2025: Expected, Not Assured^[5].

Macroeconomic Divergence: Policy, Borrowing Costs, and Global Implications

The UK and US are diverging in both fiscal and monetary policy. The UK's borrowing costs remain the highest among OECD nations, driven by inflation expectations and global debt market volatilityThe Macroeconomic Policy Outlook: Q3 2025^[2]. Meanwhile, the US's looser fiscal stance—exacerbated by high tariffs and supply chain reordering—risks prolonging inflationary pressuresFed Rate Cut 2025: Expected, Not Assured^[5]. This divergence creates a unique environment for investors: the FTSE 100 benefits from a higher-yield environment relative to the S&P 500, while the US market anticipates rate cuts that could boost equities.

The IMF's January 2025 World Economic Outlook underscores this dynamic, forecasting global GDP growth of 3.3% in 2025, with the US offsetting weaker growth in other economiesThe Macroeconomic Policy Outlook: Q3 2025^[2]. However, the UK's fiscal plan to reduce its deficit—though slower than expected—contrasts with the US's expansionary approach, further widening the gap in economic trajectoriesThe Macroeconomic Policy Outlook: Q3 2025^[2].

Investment Implications and the Road Ahead

For investors, the FTSE 100's resilience highlights the importance of sectoral diversification and global exposure. While the UK's macroeconomic challenges persist, its equity market has demonstrated a capacity to outperform through structural strengths. Conversely, the US market's performance will hinge on the Fed's ability to balance inflation control with growth support.

The September Fed decision will be pivotal. A 25 basis point cut could boost risk appetite, but a larger cut or a surprise hold would signal deeper concerns about the economy. Meanwhile, the FTSE 100's path to 10,000 remains plausible if global demand for UK equities continues to outpace domestic economic weaknessThe Macroeconomic Policy Outlook: Q3 2025^[2].

In conclusion, the UK-US macroeconomic divergence presents both opportunities and risks. Investors must navigate this landscape by focusing on sectoral fundamentals, policy signals, and the interplay between inflation, growth, and central bank actions.