After a record high, can the FTSE 100 sustain this rally?

Lale Akoner, Global Market Analyst at eToro, says: “As of March 6, 2025, the FTSE 100 has been on a strong upward trajectory, recently hitting an all-time high of 8,871.31, with year-to-date gains of 7% in local currency terms. Several key factors are driving this surge, but whether it is sustainable remains a critical question.

Defense and Banking Sector Gains

“Increased military spending across Europe, driven by geopolitical tensions, has fueled a sharp rise in defense stocks. BAE Systems rose by more than 40% YTD, while Rolls-Royce Holdings gained 41%, helping push the broader index higher. With continued geopolitical uncertainty, this sector may remain a source of FTSE 100 strength in the near term. Another source of strength has come from UK banks. The banking sector rose by 18% YTD, which are insulated from tariffs and supported by the rate cut cycle of the BoE.

Stocks Buoyed by BoE Rate Cut Expectations

“Investors are increasingly optimistic about potential rate cuts from the Bank of England. While inflation remains a concern, there is growing belief that monetary easing will provide further tailwinds for equities. This sentiment is helping sustain market momentum. This also diverges from the Fed’s policy, which halted its rate cutting cycle due to rising inflationary pressures due to tariffs of the Trump administration.

Is the Surge Sustainable?

“While recent gains are backed by strong sectoral performance and macroeconomic factors, risks remain.

“First, the Russia-Ukraine conflict and shifting US trade policies introduce volatility. While defense spending is boosting markets now, escalation or unexpected policy shifts could change the outlook.

“Second, the latest UK Services PMI slipped to 51, signaling slower growth in a key sector. If economic data weakens further, investor confidence may falter. While rate cut expectations are fueling optimism, persistently high inflation could force the BoE to maintain a more hawkish stance, potentially dampening equity markets.

Bottom Line

“The FTSE 100’s strong start to 2025, with a 7% YTD gain, has been helped by attractive valuations versus the US and sectoral strength from defense and banking sectors, alongside expectations of continued monetary easing. However, it’s uncertain whether this rally is sustainable. Geopolitical risks, trade policy shifts, and economic data will determine whether the rally has further room to run or faces headwinds in the coming months.”