FTSE 100's Record Run: Is the Bullish Sentiment Already Priced In?

The FTSE 100 has reached a symbolic peak, hitting the 10,000-point milestone for the first time. This marks the culmination of a powerful 21.5% gain in 2025, its best calendar year performance since 2009. The index's rally has been driven by global stock market euphoria, with its biggest 2025 gainers including miners, defence firms, and banks that benefited from elevated rates and geopolitical spending. Yet, this record high stands in stark contrast to the prevailing domestic mood.

A recent survey reveals a deep well of investor pessimism. UK investors have rated the outlook for 2026 at an average of just 4.3 out of 10, indicating a generally negative sentiment. Nearly a quarter of respondents expressed extreme pessimism, while only a tiny fraction saw the UK as a top performer. This disconnect frames the core question: is the bullish market rally already priced in?

The setup presents a classic expectations gap. The market has been rewarded for its defensive qualities and attractive valuations, drawing capital away from overvalued US tech. But the consensus view among those who trade the UK markets themselves is one of skepticism, citing factors like the recent budget and tax policy. In other words, the optimism that fueled the 2025 run may have already been reflected in the price. The record high now sits atop a foundation of domestic doubt, raising the risk that any stumble in sentiment could quickly reverse the gains.

The Drivers: Value, Dividends, and External Tailwinds

The rally to a record high is not a random surge. It is built on a clear, multi-pronged foundation of value, income, and external catalysts. The market has actively rotated into sectors that benefit from a weaker pound and geopolitical shifts, while its fundamental valuation and dividend yield offer a stark contrast to the overvalued US market.

The rotation into value is the most visible driver. Sectors like financials, defence, and energy have been the primary engines, lifting the index as investors seek tangible assets over speculative tech. This shift was turbocharged by a specific geopolitical event: the US military operation in Venezuela. The intervention, which included the capture of the Venezuelan president and the declaration of US control over its oil, sent defence stocks like BAE Systems, Babcock and Rolls-Royce sharply higher. It also boosted energy firms with potential access to new reserves. This kind of external shock provides a tangible, short-term tailwind that can quickly move markets.

At the same time, the UK market's intrinsic appeal is undeniable. The valuation gap is striking. The so-called Buffett indicator, a market-wide price-to-earnings ratio, stood at 118.8% for the FTSE 100 at the end of 2025, less than half the level of the US market at 219.4%. This suggests UK stocks are trading at a significant discount relative to the country's economic output. For investors fleeing frothy US valuations, this presents a clear value proposition. The index's heavy reliance on overseas earnings-about 80% of revenue comes from outside the UK-means a weaker pound further amplifies profits, making the value story even more potent.

Dividend yield is the third pillar. UK stocks consistently offer a much richer income stream, with the FTSE 100's yield nearly three times higher than that of the S&P 500. This is a critical draw for income-focused capital, especially in a low-growth environment. The combination of value and yield creates a defensive, income-generating profile that has proven attractive as global sentiment has swung.

External tailwinds are now aligning. The Bank of England is expected to cut interest rates, with money markets pricing in a cut as early as April. This shift is already reflected in the bond market, where gilts are rallying on fading inflation fears and reduced government bond supply. Lower rates typically support equity valuations and can boost financial sector earnings, providing another layer of support for the index. In essence, the rally is being powered by a confluence of factors: a rotation into defensive sectors, a compelling valuation gap, a generous income stream, and a backdrop of easing monetary policy and geopolitical events. The question for investors is whether this entire setup is already fully priced in.

The Risks: Earnings, Valuation, and Geopolitical Overhang

The bullish setup faces three distinct headwinds that could quickly reverse the record run. The first is the most fundamental: the uncertainty around corporate earnings recovery. While the market has rallied, analysts remain deeply skeptical about a full rebound in 2025 profits. The evidence shows a volatile earnings path, with a significant drop in earnings in 2024 following the pandemic recovery. Looking ahead, the consensus view is cautious, suggesting the profit growth needed to justify current valuations is far from guaranteed. This creates a classic expectations gap: the market is priced for improvement, but the underlying business performance may not deliver it.

Valuation adds another layer of risk. On the surface, the forward P/E ratio of 12.48 looks reasonable, especially compared to the US market. Yet a deeper look reveals vulnerability. The cyclically adjusted (CAPE) ratio, which smooths earnings over a decade to filter out cyclical noise, sits at 18.59. This is elevated and suggests the market is not cheap on a long-term basis. If economic growth disappoints or earnings fail to meet expectations, this high CAPE ratio leaves the index exposed to a significant re-rating. The current valuation is a bet on sustained growth, a bet that may already be priced in.

Finally, the geopolitical tailwinds that fueled the rally now carry their own risks. The US military operation in Venezuela, which sent defence and energy stocks soaring, has triggered a new wave of regional instability. President Trump's declaration of US control over Venezuelan oil sales has sparked legal and congressional debate and heightened tensions with Russia, China, and Latin American nations. While the immediate market impact may be limited, this bold policy shift introduces a new source of volatility. It risks undermining the broader "risk-on" environment that has supported global equities, including the FTSE 100. The geopolitical overhang is a reminder that external shocks can quickly flip from catalyst to headwind.

The bottom line is that the record high sits atop a foundation of optimism that may be more fragile than it appears. The market has priced in a smooth earnings recovery and a continuation of favorable external conditions. The real risk is that one or more of these assumptions-profit growth, valuation stability, or geopolitical calm-fails to hold. In that scenario, the index's defensive appeal could quickly turn into a liability.

Catalysts and What to Watch

The path from a record high to new highs hinges on a few key catalysts. For now, the market is pricing in a smooth continuation of the current setup. The real test will come from near-term data and events that will either confirm or challenge this optimistic view.

First and foremost is the earnings narrative. The market's rally has been built on the expectation of a profit recovery. Investors must now watch the early 2026 reporting season for concrete signs that this is materializing. Analysts remain deeply skeptical about a full rebound, so any report that shows further deterioration in earnings would directly contradict the thesis that the rally is justified. Conversely, strong results could validate the bullish sentiment and provide a fresh tailwind.

Second, the monetary policy backdrop needs confirmation. Money markets are pricing in a Bank of England rate cut as early as April, with a high probability of a second cut by year-end. This expectation is already reflected in the rally of UK government bonds, or gilts. The government's own actions are also a factor; it has announced it will issue no long-dated bonds via conventional auctions through March. This reduced supply supports gilt prices and reinforces the low-rate narrative. The key will be whether the central bank's actual timing and pace of cuts align with these market bets. Any deviation could quickly unsettle the bond and equity markets.

Finally, the overarching risk is a shift in global sentiment. The FTSE 100's outperformance has been relative to the US market, particularly as investors rotated from overvalued tech into value and income. If the US tech rally falters or geopolitical tensions escalate beyond the current Venezuela overhang, the entire "risk-on" environment could sour. This would undermine the defensive appeal of the FTSE 100 and its reliance on a weaker pound. The index's recent strength is a bet on global stability and continued capital flows into its value sectors. If that confidence wavers, the relative outperformance could falter quickly.

The bottom line is that the market has priced in a specific set of outcomes: profit recovery, dovish central banks, and geopolitical calm. The coming weeks will provide the first real data points to test these assumptions. Any stumble in earnings, a delay in rate cuts, or a broadening of global risk aversion would expose the fragility of the current record high.