From the outside looking in, it appears to have been a disastrous year for the UK. In just the past two weeks, the deputy prime minister has been removed following a tax scandal, and a senior US diplomat was fired for a connection to Jeffrey Epstein. As the scandals rack up and the media takes aim, the populist Reform party rises in the polls.<\/p>\n
The stock market, though, doesn\u2019t seem to care. This year, the FTSE 100 is beating the S&P 500, up 14 per cent versus 12 per cent. Whatever else has been going on in the past nine months, the expected future earnings of the UK\u2019s largest companies are outgrowing their US peers.<\/p>\n
This might seem odd given the criticism the governing Labour party has received from the business community. In April, it increased employer taxes and hiked up the minimum wage. Now, there are further worries about the Employment Rights Bill, which could make it harder to hire and fire.<\/p>\n
In contrast, US President Donald Trump passed a bill with new tax cuts and extended the 2017 cuts indefinitely. The so-called \u2018one big beautiful bill\u2019 included further benefits to encourage companies to invest more in R&D and capex. So, while the UK seems to be targeting businesses with tax rises, the US is throwing cuts at them to incentivise growth. Yet, the market doesn\u2019t reflect this.<\/p>\n
The difference is that one country has been pursuing economic protectionism, while the other has been opening up to trade. In April, the US announced sweeping tariffs on its trade partners and, while many were rolled back, it still has an effective tariff rate of around 20 per cent (higher than any point since the 1930s).<\/p>\n
It is the companies most exposed to these tariffs that are lagging. Clothing company Lululemon, which makes most of its products in Asia, is expecting tariffs to reduce its profit margin by 220 basis points this year. Correspondingly, its shares are down 57 per cent. Meanwhile, shares in retail store Target have fallen 35 per cent, with chief operating officer Michael Fiddelke saying that the \u201cstraight cost impact of tariffs will be with us as long as the tariffs are with us\u201d.<\/p>\n
In contrast, the UK has already gone through the worst of its economic nationalism, Brexit, and is now reducing its trade barriers. This year, the UK signed a trade deal with India, which reduced tariffs on more than 90 per cent of goods. It also signed a Reset Agreement with the EU, which removed most border checks on food and agricultural goods and gave UK companies access to Europe\u2019s $150bn defence fund. <\/p>\n
The impact of these deals can be seen in the stock market movements. Supermarkets Tesco and Sainsbury\u2019s shares are up 18 per cent and 16 per cent respectively, with all this year\u2019s gains coming since the EU reset was signed. The biggest beneficiaries, though, have been the UK\u2019s defence stocks. The market is forecasting a big increase in earnings, with Babcock and Rolls-Royce shares doubling this year. \u00a0\u00a0<\/p>\n
Of course, this is just looking over a nine-month window, but if the FTSE ends the year ahead of the S&P, it will be quite a rare event. Since the 2008 financial crisis, there have only been three calendar years in which the FTSE has beaten its US counterpart. One of these years was 2022, when rising interest rates hammered the fast-growing US tech stocks. However, as the graph shows, this was followed by two years where the UK lagged badly. This year\u2019s outperformance is only mild, but compared to the past two years, it\u2019s a significant turnaround.<\/p>\n
The US still has remarkable technology businesses that the UK will struggle to ever replicate. This year, Oracle and Palantir\u2019s share prices have doubled, driven by AI demand. Similarly, semiconductor designer Broadcom is up 60 per cent as it\u2019s emerged as the biggest rival to Nvidia. <\/p>\n
Sadly for other countries, the US\u2019s risk-taking culture can\u2019t easily be imbibed. However, the S&P 500 also has more businesses that are struggling, with 21 stocks falling more than 30 per cent this year, whereas the FTSE has just one (advertising agency WPP). \u00a0<\/p>\n
The UK is benefiting from being further past the peak of its economic nationalism. This summer, pollster YouGov found that only 30 per cent of Britons believe it was right to leave the EU, while just 11 per cent see it as more of a success than a failure. The EU reset in May was seen as a political risk but has already been forgotten by the public. The other benefit is that the UK doesn\u2019t have an election for four years. Some UK politicians might tend to copy their US counterparts, but whoever the next government is, it\u2019s impossible they will look at Trump\u2019s trade policy and think it was a good idea.<\/p>\n
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