The FTSE 100's Record-Breaking Momentum in 2026: Why International Diversification and Cyclical Sectors Are Now Rewarding UK Equity Exposure

The FTSE 100's performance in 2025 has been nothing short of extraordinary. Closing the year with a gain of over 20%-its strongest annual performance since 2009-the index has not only outpaced global peers like the S&P 500 but also breached the psychological 10,000-point barrier for the first time in 2026. This momentum, driven by resilient corporate earnings, a more accommodative Bank of England, and the strategic advantages of international diversification, has repositioned the FTSE 100 as a compelling destination for investors seeking value and stability in an uncertain global landscape.

International Diversification: A Strategic Edge

The FTSE 100's heavy exposure to commodities and multinational corporations has amplified its appeal as a diversification play away from U.S. tech stocks, which have dominated global markets in recent years according to market analysis. Unlike the S&P 500, which is heavily tilted toward technology, the FTSE 100's geographic and sectoral spread-anchored by energy, mining, and industrials-has allowed it to capitalize on global macroeconomic shifts. For instance, the index's energy and mining constituents have benefited from sustained demand for commodities amid inflationary pressures and supply chain constraints.

This international diversification is further reinforced by the FTSE 100's attractive valuation. Trading on a price-to-earnings (P/E) ratio of around 14, compared to the S&P 500's 25, the index offers a compelling risk-rebalance for investors wary of overvalued U.S. equities according to LSEG data. According to a report by LSEG, the FTSE Domestic and Global Exposure Index Series underscores how companies with high global sales are better positioned to navigate regional economic volatility, a dynamic that has bolstered the FTSE 100's resilience.

Cyclical Sectors: Defense and Aerospace as Growth Engines

Cyclical sectors, particularly defense and aerospace, have emerged as key drivers of the FTSE 100's outperformance. These industries are experiencing a renaissance fueled by long-term government contracts, geopolitical tensions, and technological innovation. For example, the U.S. Department of Defense's aggressive adoption of AI and agentic AI in mission planning and autonomous systems has spurred global demand for advanced aerospace and defense capabilities.

Data from Simplywall Street indicates that the U.K. aerospace and defense industry's market capitalization surged from £51.3 billion in February 2025 to £178.6 billion by January 2026, reflecting a 248% increase. This growth is underpinned by a 26% annual revenue rise and a 65% annual earnings jump, despite a current P/E ratio of 21.6x-lower than its 3-year average of 25.2x, signaling cautious investor sentiment. Experts project that AI spending in the U.S. aerospace and defense sectors will reach $5.8 billion by 2029, further solidifying the sector's long-term potential.

Geopolitical uncertainties have also amplified demand for defense stocks. Heightened tensions in regions like Venezuela, for instance, have prompted investors to anticipate increased military spending, directly benefiting FTSE 100 constituents in the sector. Similarly, the resolution of the U.S. government shutdown in late 2025 alleviated political risks, fostering a more favorable environment for cyclical sectors globally.

Valuation and Future Outlook

While the FTSE 100's valuation appears attractive, investors must balance optimism with caution. The aerospace and defense sectors' lower P/E ratio suggests lingering skepticism about long-term growth, despite robust near-term fundamentals. However, the index's exposure to global manufacturing and maintenance, repair, and overhaul (MRO) hubs-particularly in the Middle East-positions it to benefit from the decentralization of aerospace operations according to industry analysis.

Looking ahead, the FTSE 100's momentum is likely to persist if global defense spending remains resilient and AI-driven productivity gains materialize. As Deloitte notes, the integration of agentic AI into command and control systems is already reshaping the industry, with further advancements expected to drive efficiency and innovation. For investors, this creates a unique opportunity to capitalize on both cyclical growth and strategic diversification.

Conclusion

The FTSE 100's record-breaking momentum in 2026 is a testament to the power of international diversification and the strength of cyclical sectors like defense and aerospace. By leveraging its global exposure, attractive valuations, and alignment with macroeconomic tailwinds, the index has reasserted itself as a cornerstone of a well-balanced portfolio. As geopolitical and technological dynamics continue to evolve, the FTSE 100's unique positioning offers a compelling case for investors seeking both growth and stability in an unpredictable world.