What's the outlook for UK stocks over the next 6-12 months?

Get the boring bit out the way: With the Budget out the way at last I wanted to take a look at the outlook for UK equities. Last week's Budget contained few major surprises from the macro perspective – Chancellor John Healey using up some fiscal headroom to avoid spending cuts or tax hikes. That may hold for the moment, but eventually there will need to be more from the government than a few 'everyday fixes'.

The Budget did contain a number of sector specific updates, including a higher surcharge on bank profits and an unwelcome lack of funding or detail on the Your First Home scheme for housebuilders. But there was not, however, a major policy shift to unlock growth that materially alters the view on UK assets more broadly. This is likely to change in the coming months as, in my view, we head towards an early election and get a much clearer picture of the road ahead for UK stocks and bonds.

FTSE 100

For the most part, the blue-chip FTSE 100 index is insulated from the vagaries of the UK economic cycle. Nevertheless, it is chock full of Financials (~26% of index weight) and Industrials (~15%) that are exposed to Treasury policy shifts and global interest rates. Notably the increase in the bank surcharge from 3% to 6% is a headwind for banks earnings, but crucially is less than had been feared and time-limited to 15 months. As such this looks to be a sector that has some of the bad news behind it already, albeit temporary tax hikes have a habit of becoming permanent.

Meanwhile Industrials have positive tailwinds from the real increase in defence spending after the Chancellor funded the £4.7bn hole in the existing Defence Investment Plan. This is real cash that should start to flow through to the sector over the next 2-3 years. Additionally, the government confirmed the NWF and BBB will deploy an additional £20.4bn of capital to back UK strategic industries, which can be considered a tailwind for the sector. Broadly speaking, I see macroeconomic and geopolitical structural drivers in the near to mid-term being supportive of industrials, as well as energy and basic resources.

Growth downgrade

For UK-focused stocks (FTSE 250 midcaps in the main) the growth downgrade next year from the OBR is a sign of unwelcome headwinds for domestic consumption. But forecasts from the OBR do not often accurately reflect the future and investment decisions should not be based upon them.

Nevertheless, the fact that the watchdog says real household consumption per capita won't return to its pre-pandemic peak until 2029 indicates a strong headwind to domestically focused consumer cyclicals. Is that too pessimistic? Growth has picked up lately and there seems to be solid momentum in Q4.GDP expanded 1.8% in the three months to August on an annual basis, its best since 2022 when the economy was bouncing back from Covid. Manufacturing activity gathered pace in October, with expansion at a five-month high, while services activity has risen to an 8-month high. But households are not feeling the impact, which remains a problem for some sectors such as consumer cyclicals. The ~27% growth in FTSE 250 earnings projected in 2027 could be too optimistic (vs ~7-8 % for the FTSE 100) against the weaker growth backdrop, however I think we can have a more constructive view of the economic growth story and what that means for mid-caps.

Bloomberg Consensus Forecasts: 2027 

Inflation & rates

The Budget was essentially fiscally neutral and doesn't move the needle for the Bank of England in terms of the expected path of interest rates. Gilt yields have declined since the Budget announcement across the curve, indicating the market has given Healey a pass on this one. The 10yr yield has declined ~14bps from 5.35% before the announcement to 5.21%. The 2yr gilt yield is similarly lower by around ~10bps since Wednesday morning before the Budget. Markets pricing for 4 rate hikes this cycle seems too hawkish and we could see some relief for rate-sensitive sectors such as utilities. The FTSE 250 has probably more to gain than the FTSE 100 if inflation and borrowing costs ease. After a hike this month and potentially one in February, I see scope for both to fall through 2027 to support domestic equities.

Tax tweaks

Certain tax changes may produce an incentive for savers to park money with equities, particularly with income stocks and funds. Notably the extra two percentage point rise in tax on property and savings income could see some investors move more of their wealth into securities over cash or property. This argument takes on more strength since the dividend tax was left unchanged, as was Capital Gains Tax. For savers there is an incentive to switch out of cash and into 'cash-like' money market funds with a tax wrapper such as an ISA.

Cited by some as a missed opportunity, the government didn't move on axing the 0.5% stamp duty on purchasing UK-listed shares. However, the government did say it "recognises the potential economic benefits of such a change and will keep this under review as part of the government’s wider focus on supporting". Stamp duty on shares will be changed to the Securities Transfer Tax from late 2027, keeping the rate at 0.5%. Scrapping stamp duty on UK-listed shares would be a significant positive for UK equities but remains elusive for now.

US Midterms: another catalyst?

How might the Democrat clean sweep influence UK assets? Initially it looks to be very positive with the FTSE 100 up +2% on Wednesday by around 4pm GMT, led by significant 4-5% gains for banks, with strong contributions from basic resources, tech, healthcare and consumer staples; while the FTSE 250 rose 1%. My initial view is downwards pressure on global bond yields from slower Treasury issuance as well as a weaker dollar picture which is generally good for risk appetite, however it tends to be a slight headwind for the FTSE 100 vs the FTSE 250. Longer term is it likely favours trade and investment flows and may dampen down some geopolitical uncertainties, albeit we are not yet sure if a bruised President Trump now leans more aggressively on the two levers of power he can still pull: trade and foreign policy. 

Defence stocks fell after the midterm results came in, indicative of Democrats bottling up defence spending and perhaps also a sense that some of the Trump pressure on Europe to up defence spending will be less of a tailwind than it might have been. If Trump's mandate has been so definitively rebuked it brings a more Atlantic-facing, Europe-cooperating US potentially back to the table in a couple of years' time.

Dividends

The FTSE 100's 3.05% dividend yield compares favourably to the S&P 500 (~1.3%) and Euro Stoxx 50 (~3.0%), providing a meaningful income cushion for total return investors. Shareholder returns are the main support for UK equity value in the absence of significant multiple expansion. Combined with active buyback programmes across banks, energy, and consumer staples, the total shareholder yield for the FTSE 100 is materially higher than the headline dividend yield suggests.

Because dividend taxes are staying flat while savings and property taxes are rising again, dividend yield has a more tax-efficient route for generating unearned income. This supports the UK's heavy dividend paying stocks and UK equity income funds, such as the Artemis income fund or the CT UK Equity Income fund (though we should note that two of its largest holdings are GSK and Unilever, which suffered sharp pullbacks after earnings updates on the same day as the Budget).

Moreover, UK dividend growth appears notably strong vs peers and this provides investors with a bit of insulation to global risks. Capital Group says global dividends rose 7.5% in Q3, but the UK was among the biggest contributors with core dividend growth of 13.2%, making it the fourth-fastest among major markets. It reports dividends reached £32.2bn last quarter, driving by strong shareholder returns from banks and miners on surging commodity prices.

Valuations

Valuations look decent when everything else is hurting. UK stocks trade around 12x forward earnings, against the median since 1990 of 12.8x, while earnings are due to rise by 16% this year before slowing to 9% in 2027.

The AI rout has left many portfolios nursing heavy losses. Mag7 is down ~8% from its record high. Some stocks like Intel are down 50% from their peak hit earlier this year. Names like ARM, Marvell, Applied Materials and Lam Research are roughly 20-30% down on the month of October. Traditionally the FTSE performs quite well in times when there is stress in growth stocks as underscored by October's divergence in global equity markets; global equities fell –1.9% last month amid the turmoil in tech and AI names, whilst the FTSE 100 rose 1% and the FTSE All-Share index rose 1.1%. Cash-generative, mature businesses dominate the index, offering reliability when investors rotate away from high-growth stocks. Berenberg's survey of 300 global investors responsible for managing $1tn in assets showed 34% plan to increase UK exposure over the next 12 months, versus just 10% looking to reduce it.

Valuation Multiples: FTSE 100 vs. FTSE 250 (source: Bloomberg, Saxo)

The FTSE 100's lower forward P/E relative to the FTSE 250 reflects its defensive and commodity-heavy composition rather than superior earnings quality. The FTSE 250's strong FY2027 EPS growth expectation (+27.6% vs. +7.6%) suggests a significant mean-reversion recovery premium that relies on domestic demand stabilisation and rate relief that the current market consensus for growth and BoE trajectory do not yet support.

UK Equity Valuation Discount (sources: Bloomberg, Saxo)

The FTSE 100's 37.9% forward P/E discount to the S&P 500 and 20.1% discount to the Euro Stoxx 50 is among the widest in recent history. This discount reflects:

1. Structural sector composition (underweight tech, overweight energy/financials/materials)

2. Persistent domestic macro headwinds

3. UK equities remaining heavily under-owned by global investors

M&A Activity: Inbound Catalyst

The valuation discount makes UK equites structurally attractive to foreign corporates and private equity. Both the FTSE 100 and FTSE 250 have outperformed in 2026, up 8% and 9% respectively, beating the Euro Stoxx 50's 5.6% advance — suggesting that M&A optionality is already being partially priced.

FX translation effects

• FTSE 100 (~75% international revenues): A strengthening sterling is a headwind for reported earnings. With GBP up ~3.4% YoY, the translation drag on USD/EUR-denominated revenues is meaningful for mega-caps in energy, mining, pharma, and consumer staples. Should GBP soften from current levels — a plausible scenario if BoE hikes disappoint or geopolitical risk re-escalates — this would provide a mechanical earnings tailwind for the FTSE 100. On the other side, the Democrat clean sweep in Congress is seen as being mildly dollar negative in the near term.

• FTSE 250 (~70%+ domestic revenues): The mid-caps are largely insulated from FX effects, but directly exposed to UK consumer and business confidence. A weaker pound would raise import costs and further squeeze real disposable incomes, compounding the domestic demand headwind.

 Data sourced from Saxo, Bloomberg