Why has the FTSE 100 performed so well in 2025?

As we stand in early December 2025, the FTSE100 index is trading near its all-time high, just below 10,000. It has risen more than 20% since January, and more than 32% since the April sell-off caused by Donald Trump’s “Liberation Day” tariff announcements.

The FTSE100 is a stock index which tracks the value of the 100 biggest companies listed on the London Stock Exchange (LSE). The index is weighted by market capitalisation (or market cap), with more valuable companies (e.g. Astra Zeneca, HSBC and Shell) contributing a larger percentage of the overall index and smaller companies (e.g. EasyJet, Persimmon) making up a smaller percentage.

While many global stock markets have performed well in 2025 and have hit record highs in recent weeks, the FTSE100 has performed particularly well this year (having lagged other stock markets in recent years).

Why has the UK stock market risen?

When trading or investing in the stock market, you need to have a good understanding of the individual market sectors as well as the driving forces behind each sector. The strong performance of the FTSE 100 this year can be attributed to a variety of factors, from structural and macro to sentiment-driven reasons. Drilling down into the individual sectors, there have been some clear market leaders over recent months.

• Financials / Insurance – Strong half-year results from insurers like Admiral and Aviva raised optimism for the sector, and banking stocks have been boosted by higher interest rates, enabling them to increase profit margins.
• Defence / Aerospace – Defence and aerospace companies have performed very well this year due to increasing security concerns and global geopolitical tensions. These worries have forced governments to invest more heavily into defence, boosting companies such as Rolls Royce & BEA Systems with new contracts.
• Materials / Miners – Mining / commodity-exposed companies (both precious and industrial metals) have also performed well, boosted by global demand for commodities which has pushed prices higher – particularly precious metals such as silver and gold. Dollar weakness in the first half of 2025 also increased the price of commodities (priced in USD) and hence boosted mining stocks, many of which are in the FTSE.

Other drivers behind the FTSE 100’s strength in 2025

It’s not just individual sectors that have helped the FTSE 100 rise. There are a multitude of reasons for the increase in share prices, so we’ve outlined below some of the main reasons for the gains (but also mentioned some potential risks to be aware of).

Valuation gap / “cheapness” relative to peers – The FTSE 100 has lagged US and European markets for many years, especially in the tech sector, so investors looking for good value and more defensive stocks have been rotating out of expensive US tech stocks and into other sectors and markets which are seen as cheaper and more stable. Also, forward P/E multiples in the UK remain relatively low, providing more potential upside if sentiment improves.

Strong dividend yields and income appeal – The FTSE 100 is heavy in sectors that generate stable cash flows and pay dividends (such as energy, utilities, consumer staples and financials) so, in an environment where capital growth is uncertain, yield has become an important factor for many investors. Higher dividends and share buybacks can boost investor returns even when price appreciation is less impressive.

Global (rather than domestic) exposure of large UK companies – Many FTSE 100 constituents derive a large share of their revenues from overseas markets. Therefore, despite the domestic economic headwinds in the UK this year, the performance of these international companies has remained strong. Also, since sterling has weakened more than 6% against the Euro this year, any sales revenues generated in Euros convert into stronger sterling profits.

Lower interest rates – Expectations (or hopes) of interest rate cuts help reduce corporate borrowing costs and boost bottom-line earnings. The Bank of England has cut UK interest rates five times in the last 18 months, from (5.25% to 4%) as this is expected to continue into 2026.

M&A, takeover activity, and corporate deals – The UK stock market has seen a slight increase in mergers and acquisitions this year, which tends to push up company valuations, especially of undervalued or unloved names. Large corporate deals in pharmaceuticals and life sciences have also boosted some heavyweight FTSE stocks.

Warnings and potential risks

While the stock market performance has been strong for much of 2025, it’s important to be aware of the several headwinds and uncertainties that could temper further gains:

• Slower global growth (or even a recession in major economies) would cause export-oriented UK companies to be hit.
• A slowing of interest rate cuts (or even a surprise hike) would raise borrowing costs and hurt equities across the board as investors put their money into risk-free higher-yielding assets such as government bonds.
• The UK’s economic outlook is looking rather shaky, with higher taxes, higher debt and political uncertainty causing potential stock market corrections.
• Many of the reasons for this year’s buying (M&A activity, sector rotation and yield chasing) are sentiment-driven and could reverse quickly.
• If the dollar strengthens and/or the strong commodity cycle fades, then sectors like mining and energy would suffer, dragging the FTSE lower.