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There’s talk of a new stock market crash doing the rounds, and it must surely be holding the FTSE 100 back.
But I want to explain why I don’t see the FTSE 100 crashing in 2023. And I’ll also tell you why I don’t think it matters even if it does.
US vs UK
All the crash talk I read is about the S&P 500 being too high. And the Nasdaq, which has climbed again after its falls of 2022.
Nasdaq growth stocks are up by 75% over the past five years. And S&P stocks have gained 58% in the same time.
That’s pushed the S&P to a price-to-earnings (P/E) ratio of 25, which is above its long-term trend. That does looks a bit scary to me. And yes, I think it could be an overheating index ready for a fall.
But our poor old FTSE 100 is down 2.5% in the same five years, on a P/E of about 11. And it doesn’t look at all like a bubble waiting to burst to me.
Cash and dividends
Stock markets don’t often crash when an index has already had a bad decade and is on a low valuation. And it’s rarer for a crash to come along when cash flows and dividends are rising.
And that’s what I see on the FTSE 100 right now.
Dividend forecasts have slowed a bit. But at the halfway stage in 2023, analysts were forecasting a total payout of £83.8bn from FTSE 100 stocks. That’s a fair bit more than the £76.1bn paid in 2022.
It’s also not far off the all-time record of £85.2bn set in 2018, before Covid. Oh, and this is ordinary dividends only. It doesn’t include specials, or any of the big share buybacks announced so far.
The City also thinks that earnings growth is going to be there to cover the predicted dividend gains.
Forecast pre-tax profit looks set to grow by a total of more than £50bn. And earnings should cover dividends, on average, a little over two times.
Interestingly, it looks like the biggest share of earnings growth in 2023 should come from financial stocks. And they’re on some of the FTSE 100’s lowest valuations.
We see banks on P/E multiples of only around five or six. And insurers and investment firms aren’t valued a lot higher.
Does it matter?
None of this, to me, makes FTSE 100 stocks look overvalued and set for a crash.
Saying that, I’d rate a correction over in the US as a very real possibility. And if that happens, I’d expect stock markets around the world to decline as a result.
But I just don’t see the potential for any sizeable declines here, not with Footsie stocks on such low valuations and high dividend yields.
And if the FTSE 100 does wobble, I say it would be a good thing. It could give us a chance to snap up cheap UK shares even cheaper. The real challenge would be deciding which ones to buy.