Despite the recent stock market rally, FTSE 100 stocks continue to trade at prices below their pre-coronavirus levels. In fact, the index is around 10% down compared to where it was a year ago.
As such, some investors may feel that large-cap shares offer good value for money, as well as capital growth potential.
However, other investors may feel that after a 30% gain for the FTSE 100, it’s better to wait for the next stock market crash. After all, the market has never made permanent gains.
The problem with both of these approaches is they seek to predict the future. Instead, it may be prudent to analyse individual stocks, rather than try to time the market.
The prospects for FTSE 100 stocks
FTSE 100 stocks could realistically experience a fall or a gain in the coming months. On the one hand, the economic outlook is extremely uncertain at the present time. Consumer confidence is weak, while unemployment levels are on the up. This could mean the stock market declines heavily from its current price level.
On the other hand, there’s the stimulus action from the Bank of England. And there are investors who look beyond short-term economic challenges. These may well cause the recent stock market rally to continue. This may also mean the valuations of today’s cheap shares rise on the back of improving investor sentiment.
The challenge for investors in FTSE 100 stocks is that accurately predicting either outcome over the short or long term is extremely challenging. Even if the economy’s future improves from now, investors could become less positive about the stock market for a variety of other reasons that are currently difficult to identify.
Long-term growth opportunities in a stock market rally
While the future for FTSE 100 stocks is always uncertain, its long-term performance is likely to be positive. After all, it has delivered an annual total return in the high-single digits since its inception in 1984. And that’s in spite of experiencing numerous downturns, corrections and bear markets along the way.
Although such a return is by no means guaranteed in future, a long-term investment horizon may help an investor to build a portfolio that’s more likely to produce positive capital returns in a growing stock market environment.
Furthermore, considering each company on its own merits, rather than trying to analyse the index itself, could be a sound move. Not all large-cap shares will move in line with the market, whether in a rally or a crash.
Some companies, for example, may be undervalued at the present time and could outperform the wider market over the long run. Buying a diverse range of them today could help to reduce risk, and capitalise on a likely stock market recovery from its current level in the coming years.