My FTSE 100 Forecast for 2016

In the past, I have generally stayed away from making stock market forecasts over a one-year period because, for the most part, they are little more than guesses.

However, this year I’m going to throw my hat into the forecasting ring in the hope that somebody, somewhere, will find it useful.

A CAPE-based forecast

To start with, all of my FTSE 100 valuation ideas are based around Robert Shiller’s CAPE (Cyclically Adjusted PE ratio), which uses ten-year inflation-adjusted earnings in the ratio rather than last year’s earnings as is the case with the standard PE ratio.

With the FTSE 100 at 6,061 points at the close of Wednesday (16/12/2015), the CAPE ratio (based on data that I have collected) stands close to 11.7.

My working assumption is that the long-term average value for CAPE is 16, an assumption which is based on more than 100 years of data that Shiller has for the S&P500 on his webpage).

That average value is important because markets tend to revert back towards their long-term average value given enough time.

So with the FTSE 100’s current CAPE at 11.7 and the long-term average (also known as fair value) CAPE at 16, my base assumption is that the FTSE 100’s CAPE ratio will head back upwards towards that long-term average.

Given that basic picture, the next question is:

By much do I think the market’s CAPE will move back towards its average by the end of 2016?

Forecasting the FTSE 100’s CAPE ratio for 2016

I could, for example, assume that the market’s CAPE ratio will be back at 16 within a single year.

To make a forecast on that basis it would be helpful to know the FTSE 100’s current cyclically adjusted earnings (ten-year inflation-adjusted average).

Those earnings are equal to the index level divided by CAPE:

Cyclically adjusted earnings = 6,061 / 11.7 = 517 index points

The answer is in index points, which is a strange unit (compared to pounds, for example) but it’s perfect in this context.

With those earnings and a CAPE ratio of 16 the FTSE 100’s fair value can be calculated as:

FTSE 100 current fair value = 517 * 16 = 8,272

Putting the FTSE 100’s current fair value at 8,272 may seem excessive, but at that level, its dividend yield would still be 3%. that’s a fairly typical yield, so 8,272 is really not expensive at all.

However, the market is not expected (by me or others who dabble in CAPE-based market forecasts such as GMO) to revert to its mean value in a single year. The usual expectation is that it will take somewhere between five and ten years, depending on how far away the market’s current CAPE value is from its long-term average.

On a more practical level, I don’t expect the FTSE 100 to breach 8,000 by the end of next year, although of course, I could be wrong.

So, how much might the market move in a single year?

I think a reasonable guess is that the market will move 50% towards its fair value in any given year.

At that rate, it would take about five years for the market to move from extreme overvaluation or undervaluation (which I define as a CAPE value which is double (32) or half (8) of fair value respectively) back to fair value.

For example, at the end of 1999, the FTSE 100 stood at 6,666 and its CAPE was indeed at 32. Using this assumption that the market’s CAPE will move halfway back towards its long-term average over the following year, the forecast for CAPE at the end of 2000 would have been 24.

With a forecast CAPE ratio of 24 at the end of 2000 the FTSE 100 would have had a value of 5,000. That’s a pretty bearish forecast, especially given the euphoric environment at the time for stock market investors. But it was also broadly correct.

Of course most of the time this forecast will turn out to be wrong, but for me that just means the market has got it wrong rather than the forecast being wrong.

Using that 50% move towards fair value idea, I can now forecast the FTSE 100 CAPE ratio for the end of 2016 by calculating the mid-point between its current value and fair value:

2016 Forecast CAPE = (16 + 11.7) / 2 = 13.9

Now that I have a forecast for the FTSE 100’s 2016 CAPE ratio, the last piece of the puzzle is to forecast what its cyclically adjusted earnings will be at the end of next year. After all, those average earnings may be 517 index points today, but that’s unlikely to be the case a year from now.

After that, all I’ll need to do is multiply that earnings forecast by the CAPE ratio forecast to get the final FTSE 100 forecast.

Forecasting the FTSE 100’s cyclically adjusted earnings

My CAPE data, which goes back to 1987, shows that the FTSE 100’s cyclically adjusted earnings have increased in every year except 1999 and 2015.

The ten-year average earnings dropped this year because the FTSE 100’s real earnings in 2015 (361 index points) were far below their level in 2005 (505 index points).

I expect the same thing to happen next year.

In 2006 the FTSE 100’s real earnings were 597, driven by the credit boom. However, for the last few years, earnings have been below 500 index points and I expect that to continue. So 2016’s real earnings are likely to be less than 2006’s, which will drag down the cyclically adjusted earnings figure.

I think a reasonable assumption is that the FTSE 100’s earnings in 2016 will be close to the average of the last decade (which is 517), so my guess for next year’s earnings is:

2016 Forecast for FTSE 100 earnings = 500 index points

That is a complete guess, and the real value could well turn out to be much less than that, but it’s a reasonable guess and is good enough given the amount of uncertainty in any forecast.

Putting that 500 value into the list of real earnings from 2006 to 2016 gives the following:

2016 Forecast for FTSE 100 cyclically adjusted earnings = 510 index points

So here I’m forecasting that the fair value of the market (which is a multiple of those cyclically adjusted earnings) has dropped slightly, as indicated by the decline in cyclically adjusted earnings from 517 in 2015 to 510 in 2016.

Forecasting fair value for 2016

Now that I have some average earnings to work with, it’s easy to forecast fair value for the end of 2016 by multiplying that average earnings forecast of 510 by the fair value CAPE of 16:

2016 Fair value forecast for the FTSE 100 = 8,160

So my 2016 fair value forecast is still north of 8,000, which for me means we are unlikely to get there in just one year.

Okay, enough with the preamble (unless you skipped it), let’s have a look at the actual forecast.

Forecasting the value of the FTSE 100 for the end of 2016

To get the actual forecast, where I assume the market closes half the gap between its current CAPE and fair value CAPE, I can just multiply the forecast cyclically adjusted earnings of 510 by the forecast CAPE of 13.9.

That, to the nearest 100 index points, gives the following final result:

FTSE 100 forecast for the end of 2016 = 7,100

Not exactly earth-shattering, but it’s an entirely reasonable forecast and is a fair indicator of my slight bullishness for the UK market over the medium term.

It will of course turn out to be wrong, but the underlying ideas are still sound and I think this is a useful exercise which will become much more useful when the market reaches extreme valuations.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

30 thoughts on “My FTSE 100 Forecast for 2016”

    1. Hi Gustavo, I wouldn’t call it very cheap. Stock markets generally move within a range which goes from about half to double their long run average CAPE, so a CAPE value of 16 is average (approximately) and 8 is very cheap.

      I tend to break it into bands where:

      8-10 (4,200-5,300) is very cheap
      10-12 (5,300-6,400) is cheap
      12-14 (6,400-7,400) is slightly cheap

      14-20 (7,400-10,600) is normal

      So currently, with CAPE at 11.7 (6,100) we’re in the cheap band. Obviously those bands are arbitrary, but that’s how I define it.

      On the high side:

      20-24 (10,600-12,700) is slightly expensive
      24-28 (12,700-14,900) is expensive
      28-32 (14,900,17,000) is very expensive.

      Anything outside of those ranges is extremely expensive or cheap, which occurs (at least from US data) in about 5 years out of 100 years.

    2. Interesting article – thanks. The overall CAPE approach makes a lot of sense to me for a long term view (ten or more years). But I wonder whether much can be said about how the CAPE ratio will behave over a short timescale (e.g. 1 year). Looking at it seems that the S&P 500 CAPE can continue on an overall downward trend below the mean for quite long periods. For example, 1908 to 1921, 1973 to 1982.

      As I recall, the CAPE for the FTSE 100 was also below the mean a year ago, and so on the above reasoning could also have been expected to be up substantially be now.

      On a longer timescale I do think it is reasonable to expect the CAPE for the FTSE 100 to revert to the mean, although I can think of reasons why it might not. For example, the UK’s relationship with the EU, the Eurozone collapsing, or the world taking too long to seriously address climate change.

      On a related topic, does anyone have any thoughts on why the S&P 500 CAPE has remained above the mean for so long (looks like about 5 years from the graph)?

      1. Hi Chris, I don’t think much can be said about how the CAPE ratio or the market will behave over a one-year period. That’s why I don’t usually do these short-term forecasts. However, My goal with this article is to look at the “expected value” for the market a year from now rather than to try to actually predict where it’s going to end up (as that is impossible).

        It’s a bit like betting on whether or not the next roll of a dice will be higher or lower than the previous role. The expected value of a series of dice rolls is 3.5, although of course you can never actually roll a 3.5. If you roll a 2 you should be that the next roll will be higher, because the expected value is higher. However, that doesn’t mean you won’t roll a 1 or a 2, in which case you would lose the bet. But even though you lost the bet you still made the right decision by betting that the next roll would be higher than a 2.

        It’s the same with the market. The expected value from the article is around 7,000. The market is below that so it’s reasonable to expect the market to go up, given enough time. But that doesn’t mean it will go up in the next year, and if it goes down in the next year that doesn’t mean the expectation that it would go up is wrong. Like the dice roll, the market is random in theory, but not completely unpredictable in practice.

        As for it not reverting to the long-run mean, I completely agree, it might never get back there. However, I think it is very likely to and without that assumption we’re just left guessing or making it up as we go along. And if there is an all-out nuclear war it will go to zero, but by that stage we probably won’t care.

        On your last point, the S&P 500 is definitely interesting. It has been above its mean for most of the last 20 years, so does that suggest that we have a new mean? Are investors happy to pay higher prices for stocks as they generally outperform (i.e. there is an equity risk premium)? Perhaps, but we need much more evidence to know for sure. Personally I prefer to measure the CAPE mean over 100 years rather than from the beginning of Shiller’s dataset. I think that’s more sensible as it limits the reference to historic valuation ratios which may not be relevant today, whilst still basing the mean on a very long set of data.

        Perhaps by 2050 we’ll be saying that the mean CAPE is in fact 20 rather than 16, although of course that still won’t give us a crystal ball through which we can see the future, unfortunately.

  1. Sounds reasonable, it does seem cheap right now according to these figures, as well as other ways of assessing it. Now, to look for some quality value shares…

    1. Hi TV, yes the market looks cheap in various ways. For example, I could have just said:

      “The dividend yield is over 4% which is higher than the historic norm, therefore the market is (very probably) attractively priced”,

      but where’s the fun in that!

      As for quality value shares, I think they will be hard to find for a while because a lot of them, or at least a not insignificant minority, either already have or will shortly cut their dividends. This will make it more difficult to differentiate between lower and higher quality companies as both may well end up cutting dividends. The difference is in how quickly they bounce back.

  2. Is the FTSE cheap?
    I’m not sure. I take a FTSE snapshot once every month and look at three simplistic numbers:

    Index ÷ PER = Implied earnings.
    Index x Yield % = Implied dividend.
    Dividend cover.

    As at 4th December 2015 we see Index 6238, implied earnings 360 (PER 17.31) and dividend 249 (3.99 %) covered 1.45 times.

    Since my records began on 3rd December 2004 the yield % has never been this high since 1st July 2009 when it was 4.63%. (Index 4340)

    At 1.45 times, dividend cover has never been so perilous throughout the whole 11 year period.

    11 years ago the FTSE 100 companies produced implied earnings of 328. A rise to this month’s 360 is no better than 0.85% compound growth over this 11 year period – way below inflation. In all those years, however, earnings have fluctuated between 299 and 628.

    Conclusions, albeit lacking the sophistication of CAPE:

    • Dividends look vulnerable – prices may fall.
    • A PER of 17.31 is at the high end of the 11 year range – it was 7.23 on 2nd March 2009
    • Earnings peaked at 628 on 3 October 2011 and have been trending (almost sliding) downwards ever since – they may fall further.
    • I’m dithering – and we haven’t considered geopolitics yet.

    So I’m grateful for your analysis. I’ll stay invested and, perhaps, pick an odd stock if I can find value somewhere. Thank you.

    1. Hi Larbert, I totally agree with most of your points, although my conclusion on valuation is different.

      I actually wrote an article for on the risks to the FTSE dividend and the decline in earnings since their short post-crash recovery:

      So overall I would agree, earnings are going down and are now little changed from a decade ago, but of course the macro environment much tougher than in 2005/6. But yes, not exactly a stellar result.

      Dividends are under threat at the index level and I think the Capita Dividend Monitor said that they are likely to fall. However, I don’t think they’ll fall much as they tend not to at the index level. Even in the crash of 2008/9 the index’s dividend didn’t drop by much.

      I do think the market is cheap, but it can stay cheap for years and there is little reason, at least for now, for a new bull market to begin. However, given the inherent uncertainties my forecast is still north of where we are today.

      Thanks for your comment


    1. Hi Andrew,

      In my reply to TV’s comment I was specifically talking about quality value stocks, which is different to just saying the “best” companies.

      However, even if I was talking purely about the best companies it isn’t necessarily the case that the companies that don’t cut their dividends are “better” than those that do.

      For example, a company can maintain its dividend for many years while while it has a gradual build up of problems. Those dividend payments can actually hurt the company because they withdraw cash which could have been used to help fix the problems. In contrast, a company that cuts the dividend early may in fact have more rational management who have the company’s long-term interests at heart. If the dividend is cut so that the retaining cash can be used to fix operational issues or reduce borrowings, then that dividend reduction may add far more shareholder value than if the dividend had been paid out and the problems left to fester.

      A progressive dividend policy is certainly something I look for in an investment, but it is not something that should be pursued if it is going to reduce value (and dividend payments) in the long-run.

      Also the point about quality value is important, because you may well find a company that is highly unlikely to cut its dividend, such as Reckitt Benckiser (which I own), but because it is so obvious that the dividend is likely to keep growing the company is popular and therefore expensive. From a value investor’s point of view that may be the best company but it is not the best investment (not that I’m saying that about RB though).

      So overall I am generally, and especially at the moment, somewhat ambivalent about dividend growth and dividend cuts as both of them can be either good or bad. It depends on the details of the situation.


  3. Good article and I can’t fault your quantitative analysis. However, all this depends on the price of energy/metals. The FTSE, unlike the DAX, CAC40, S&P etc. is overloaded with miners and energy companies, and who is to say the bottom is in yet in commodities.

    1. Hi David, thanks. that’s a good point and I agree that the FTSE 100 is relatively heavy with mining, oil, energy and related stocks. However, I wouldn’t call it overloaded (about 20% of the FTSE 100 is in commodity-related stocks I think), especially since these stocks have for the most part already seen massive share price declines.

      Personally I would say that the commodity cycle is an important factor which can significantly move the market, but there are a million-and-one other factors (both positive and negative) which are also likely to have just as big an impact in the next year and beyond.

  4. Interesting analysis, but in my opinion there is a bigger chance, that FTSE100 will fall rather than rise. I m not convinced at all, that over 7.000 point within a year are possible, especially when I m looking on the index chart.

    In case of the dividend, the level of how much the company pays to its shareholders should be tightly dependent on the amount of money it generates after all basic costs and investing opportunities. The low level of dividend is not bad, if the company investing it wise or cannot afford to pay it,

    1. Unfortunately the market will do as it pleases (!) and my forecast is just that, a forecast of my “expected value” for the market. It will be wrong, but I think that statistically the balance of probabilities are for a move to the upside.

      However, you could would well be right and a move downwards is quite possible. If the market did fall then I would be even more bullish for the medium and longer-term future.

  5. Interesting article as usual. I topped up a little bit with FTSE trackers in the recent dips. If it stays at this price or drops I’ll probably switch back on the monthly regular purchase option on the SIPP, which has been off for quite a while.

    I wonder if the CAPE bands for normal, etc are valid for the FTSE, given that you’ve had to take them from long term S&P data. My intuition tells me that the US has always been a market more driven by growth, and certainly much less by dividends. The yield valuations you use for the FTSE would I think have less relevance on the S&P 500 because so many companies there retain earnings for reinvestment. If, long term, the US prices for more growth than the FTSE, then the long term normal CAPE for the S&P 500 would be higher than the FTSE’s.

    It feels to me that a reversion to 7,100 in a year is unlikely. Not that I think it won’t touch that, but I don’t think it’s likely it’ll get there and stay there/near there.

    As you’ve said before, the greater the difference between current CAPE and mean CAPE, the more likely reversion is to happen, and the greater the magnitude of reversion. If the mean CAPE for FTSE is actually slightly lower than 16, then predicting based on mean reversion would give a higher likelihood of reversion as well as a higher magnitude of predicted change than may be actually likely. This effectively gives an impression of less risk/higher reward.

    But I’d be happy if you were right.

    1. Hi Bob, I completely agree.

      I think your point about the FTSE mean CAPE being lower than the S&P500 CAPE is probably right. I have seen some data suggesting that over a century or so it is as low as 12. However, given the last 30-years of data where it has been consistently close to 20 I doubt that 12 will be the mean going forwards.

      I think 16 probably is too high, but perhaps only slightly, and the range of possible future values is wide enough that I doubt it would strongly affect the accuracy of the approach.

      I will of course change that mean once I have enough data from the UK to be confident, but that might take another 20 years or so, so 16 will have to do for now.

      Thank you for your thoughtful comments,


      1. If your recent record of performance holds firm, I would expect you would have left this all far behind and be living on an island somewhere long before 20 years comes up!

  6. Interesting information. Personally never been a fan of Schiller, listening to him talk regularly on CNBC. He doesn’t come across very well and the fact he is so regularly on the program worries me that he hasn’t anything better to do — he also doesn’t think laterally beyond his own sphere of the CAPE theory.

    Don’t get me wrong it’s not an unreasonable set of measurements and John, you are right to adopt some sensible measure of overall valuation, although at the end of the day it’s about the quality of the individual company you invest in, their level of expertise in outpacing the competition, their lock on the intellectual property or their control of the distribution on a worldwide basis that usually matters most. That coupled with control over debt and cashflow.

    Looking across the broad market, I’d say there are many companies that are pretty crappy at handling the points in my middle paragraph here and that is because they have a weak hold on the E aspect of the P/E ratio. Why is this? — well many have been buying back stock at prices above the companies intrinsic values for years, and they have loaded up on cheap debt to fuel growth that in many cases is at less profitable measures before starting out on this path.

    These factors probably make the fundamentals of the E in the P look higly suspect this time around. With QE and artificially low interest rates muddying the global financial markets for 10 years now, it looks like an accident ready to happen.

    I think there is a very good reason why the likes of Terry Smith indicate that there are probably only 75 companies in the world worth investing in.
    Many companies look like thay have interesting valuations, but have very little in terms of locks on their products or markets, are very samy in their approach and get shocked when a competitor hit’s them hard or their finances drag them to the floor with even only a modest change in circumstances.

    A very large % of the FTSE is probably uninvestable on that basis.


    1. Hi LR,

      Good to hear from you again.

      I must admit that I am a numbers man first and foremost and I use CAPE because of the amount of research which has shown it to have pretty good predictive power relative to other methods such as yield or PE (although far from perfect and PE20, PE30 and Tobin’s Q have better track records).

      So the forecast should be viewed with that caveat and doesn’t look at the quality of companies or earnings and so on. However, I’m not sure those things really matter in this context as it’s a forecast of the movement of a passive index and the whole point of passive indices is that you don’t look at the details (the market is “efficient”, or so they say), other than that it be a large, liquid, global index, which the FTSE 100 is.

      Having said that your point about the investibility of individual companies is interesting. Terry Smith has one very narrow approach, so I wouldn’t define investible by what he does. His approach works, but it is but one of many ways to skin the market cat (to coin an unpleasant phrase).

      Personally I think my style is closer to Woodford, and it would be interesting if they wrote a blog about their quantitative analysis, unless they already have and I’ve missed it?

      Merry Christmas


      1. Hi John, Fair points about the index — however distorted it is by oil and metals.

        Please keep your style close to Woodford, but select some different stocks — (tongue in cheek)
        Like avoid:-

        Allied Minds
        Imperial Innovations
        Game Digital – down 39% as I type today alone
        SSE — although he probably got out without much loss
        The AA — unbelievable debt (or any company bought out of private equity)
        Rolls Royce — you did avoid it — I didn’t but at a much lower level and less of a current loss
        A whole bunch of biotech stocks – too many to list

        I think Terry’s article about nobody reading annual accounts is on the money and looking at the list above it’s pretty obvious they were not consulted when choosing some of these.

        Here is Terry’s article again for anyone who hasn’t read it — pretty solid advance warnings given about Astra and Glaxo, unlike his Tesco article which was written after the Tesco crash — >—why-bother-cooking-the-books-if-no-one-reads-them

        Don’t get me wrong he’s not the messiah, but at least he’s a thinker and has a financial method to speak of. He does sometimes contradict himself though in that Johnson & Johnson is in his top 10 list of holdings and J&J’s pharmaceutical business dwarfs Astra and Glaxo, and it also has a goodly list of exceptional items reported in the accounts each year.


      2. Hi LR, sorry for the late reply. If you read Terry Smith’s book, Accounting for Growth, it’s obvious that he has a supreme eye for detail and facts, which is what drives his cash-focused approach (profit is an opinion while cash is a fact, I think is the saying). I think he’s supremely good at what he does, but not everyone can (or should) invest like that. Personally I much prefer statistics to accounting, and that preference dictates a lot of my approach.

        And it will be interesting to see what happens to Glaxo and Astra, especially as I own both of them!

  7. which of these is best fund index ?:




    1. Hi Gustavo, I can’t really comment on individual funds or ETFs as that’s not really my area. Other than searching the web you might want to ask for some opinions at Monevator or on the Motley Fool boards. I’m sure there are other good passive investor sites that I’m not familiar with as well.

  8. Hi,
    I’d like to add my appreciation of your articles.
    In terms of CAPE – I would like to see a similar analysis of, say, the 250 index as being more representative of the UK market as a whole.

  9. The sell-off continues…but your calm analysis actually reinforces the notion that one should do nothing, just stand there (as Bogle might say).

    1. Hi Sean, yes that’s exactly what I would suggest. “Don’t just do something, stand there!” is how it’s often described, and in most cases I think that’s very sound advice.

  10. Dear John

    I am interested to know why you would usu Schiilers CAPE historical average of 16 for the S&P 500 rather than the equivalent figure for the FTSE 100 in clalculating FTSE predicted values?

    David Banks

    1. Hi David, the main reason is that I only have a relatively short amount of data for the FTSE 100, going back some 30 years. That sounds like a lot, but it covers two significant bull markets and the largest bubble in the history of equities (the dot-com bubble) so the average CAPE value is likely skewed upwards relative to its future average value.

      Using the FTSE 100 CAPE data I have, the mean is 18.9 and the median is 19, which are above the US average of 16. Since the US market typically trades on higher multiples than the UK market, those UK averages are indeed likely to be above the “true” average.

      Using the S&P500 average of 16 is of course also wrong, but it’s a reasonable proxy in my opinion. Most large country-specific indices have average CAPE values somewhere near the mid-teens. If you look at this study:

      Global Value: Building Trading Models with the 10 Year CAPE

      The the mean and median long-term CAPEs for a range of international indices is about 18. Given the inevitable uncertainty and unpredictability of the markets I think 16 is a reasonable guess at the true long-run value for the UK.

      I do keep an eye on the UK value though, so at some point in the next 20 years I’ll switch over the using the UK average.

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