FTSE 100 vs S&P 500: which offers me better value right now?

Jon Smith puts on his thinking cap when deciding whether it’s better to allocate funds to the UK or the US via the S&P 500.

Published 8 October

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Both the main FTSE index and the S&P 500 have hit fresh record highs within the past few weeks. This presents UK investors with an interesting dilemma. With new cash to put to work, does it make more sense to stick to the UK stock market, or is it worth buying AI high-flyers listed across the pond? Here’s where my head is at right now.

The case for the FTSE 100

The most obvious reason to root for the FTSE 100 is on the basis of the price-to-earnings (P/E) ratio. It’s currently at 17.7, versus 31.3 for the US stock market. Therefore, even though both indexes are near record levels, I’d argue the FTSE 100 could rally further. This is because the ratio is less stretched than in the US. Not only that, but there’s a large difference in the average P/E ratios.

Another factor is the dividend yield. The average yield of the FTSE 100 is over double the S&P 500. So let’s say that we do get a correction in global stocks before the end of the year. If an investor has a good portion of UK holdings, the income payments from dividends can help to cushion any potential unrealised losses from the share price movements. This might not seem like a big deal, but it can certainly be a helpful element when thinking about where the real value is.

Don’t forget the S&P 500

Despite the value appeal of the FTSE 100, there are reasons to like the US. The S&P 500 offers exposure to the global leaders in AI, tech, and healthcare, areas that have generated sustained compounding returns in recent years. Investors simply can’t replicate this in the UK.

The US economy has proven far more resilient than the UK’s, with lower recession risk and higher productivity growth. That’s another appeal to diversify a portfolio away from the UK.

Overall, I think the UK is better value right now, but investors can look to build a portfolio with some exposure to both, getting almost the best of both worlds.

This way, that way or both ?