Why the FTSE 100 is making record highs

There are times when events in the stock market make headlines. This has happened recently, with FTSE 100 reach new all-time highs.

On February 3, the index ended the day at 7,901.8, surpassing the previous closing record of 7,877.45 set on May 22, 2018. Last Thursday (February 9), it made a new high again, closing at 7,911.15.

What caused Footsie to record levels? Which stocks are leading the charge? And can it be wise to invest when the market is as high as it is now?

Size matters

The FTSE 100 is an index of the 100 largest companies in the UK, weighted by market capitalization. Market capitalization is calculated by multiplying the company’s stock price by the number of shares issued.

For example, on February 9 the Footsie high, AstraZenecaThe share price is 11.390p and it has 1.55 billion shares. This gives it a market cap of £176.5bn and makes it the largest company in the index.

The smallest constituent, The Frasers Groupit has a share price of 794p, a stake of £477.5m, and a market cap of just £3.8bn.

Because it is weighted by capitalization, the performance of the FTSE 100 is largely driven by larger companies. To give you some idea of ​​this, the 11 largest companies now make up 50% of the index, while the 11 smallest make up just 2%.

Taste

In news coverage of Footsie’s new heights, BBC economics correspondent Dharshini David explained: “The FTSE 100 is dominated by banking and energy companies, which have performed well, the latter boosted by higher oil and gas prices.”

Intuition, this sounds on the mark. After all, higher interest rates are profits for banks. And we’ve heard a lot about it “‘BP and Shell set record ‘obscene’ profits.”

However, intuition is not always correct.

Banking

At the latest all-time high, blind banking HSBC is Footsie’s third largest company, with a market capitalization of £123bn.

However, the share price and capitalization are about 17% below the level of the market peak before May 22, 2018.

And the story is the same with other Footsie banks.

oil

shell (£171.6bn market cap) and BP (market capitalization £98.6bn) were ranked second and fifth in the FTSE 100 at their most recent high.

The former’s stock is 10% lower and the latter 7% lower than at its previous peak. And with both companies having done a lot of share buybacks since 2018, the decline in market cap is even more pronounced: 25% for Shell and 16% for BP.

The market capitalization of HSBC, Shell and BP fell by an aggregate of £103bn between the Footsie highs of 2018 and 2023.

Hero

If banks and oil giants had a negative impact on the FTSE 100 during this period, what drove the index to new record levels?

The aforementioned big pharmaceutical company, AstraZeneca, has been a heroic champion for its shareholders and the index. On 9 February, the share price closed at 11,390p, up 109% from the level on 22 May 2018.

The number of AstraZeneca shares in issue has also increased, largely due to its $39bn acquisition in 2021 in a cash and stock deal. Thus, the increase in the company’s market cap is even more pronounced than its share price. Market capitalization rose by 155% – or £107bn – more than offsetting the negative impact of HSBC, Shell and BP.

Supporting players

I would be overstating it – but not by much – if I said that AstraZeneca has not only delivered to its shareholders, but also single-handedly dragged the FTSE 100 to a new all-time high.

There are some strong supporting players. The big miner Footsie has changed the investors and the index. Rio Tinto (share price up 51% and market cap up £23bn), Glencore (+ 39% and + £ 12bn), and Anglo American (+79% and +£19bn) were ranked seventh, eighth and 11th when the index rose on 9 February.

Other notables include the sixth-ranked beverage giant Diageo (+ 29% and + £ 12bn), and ranked fifteen London Stock Exchange Group (+69% and +£23bn).

Another fresh high

I posed the question at the top of this piece: can it really be wise to invest when the market is as high as it is now?

I have two comments. First, investors who bought the likes of AstraZeneca, the big miner, Diageo and the London Stock Exchange on May 22, 2018 might be laughing now.

And secondly, as I was preparing to submit this article, the FTSE 100 just closed at another fresh high: 7,947.6.