What’s driving the FTSE 100 in the light of negative UK plc headlines?

Over recent months, it’s been hard to find a positive headline about the UK economy. Like other global markets, the UK was shaken by President Trump’s tariff announcements in April and their repercussions.

There has also been increasing media coverage of the so-called “black hole” in the UK’s finances. The chancellor’s proposed welfare cuts and changes to Winter Fuel Payments have proved unpopular and were largely overturned. She must now find alternative ways to plug the gap.

We’ll be watching closely for her announcements on this in the Budget on 26 November. In the meantime, read more about how the government could plug the multibillion-pound gap to discover some of the potential options open to the chancellor.

Despite this somewhat gloomy backdrop, the FTSE 100 has seen record-breaking success.

This may seem contradictory. Many people wrongly believe the FTSE 100 is a proxy for the UK economy. In fact, it is driven by a number of other factors, which are often at odds with the performance of UK plc.

Read on to find out more about the key drivers of the FTSE 100 and why it is not necessarily a reflection of the domestic economy.

Overseas operations are not always in the UK economy’s best interests

The FTSE 100 is an index of the 100 largest companies on the London Stock Exchange (LSE). It includes big names such as Rolls-Royce, Shell, and HSBC, as well as some lesser-known but highly successful companies.

These examples highlight why the FTSE 100 is not an accurate reflection of the UK economy, and vice versa.

For the most part, the listed companies are large, multinational operations with global interests. According to MoneyWeek, more than 80% of the revenues from the FTSE 100’s component businesses are derived from abroad, with some even making 100% of their sales overseas.

On a similar note, as so much revenue is generated abroad, currency movements can affect the FTSE 100. In some cases, this is in direct correlation with a poorly performing UK economy. If sterling is weak, this can increase the value of foreign earnings when they have been converted. Conversely, for the same reason, a strong pound can be a disadvantage to many FTSE 100 companies.

The overall performance of the FTSE is measured in points, which quantify the combined values of its component companies. Even while the media was bemoaning the UK’s lacklustre economy, it was also reporting record highs for the FTSE 100.

In July 2025, it reached a record level of 9,000 points, which could seem surprising in the wake of the US tariff announcements.

Indeed, the FTSE 100 did slump in the days after the initial tariff announcements, with spooked investors fearing the impacts on global trade.

However, as the Guardian reported, many investors were confident that President Trump would not act on his full tariff plans.

When the president did press pause on some of the tariffs, the UK markets rose once more. Investors seeking to diversify away from US stocks amid uncertainty over US economic policy partly contributed to the record high of the FTSE. Britain has also emerged as one of the few countries to strike a guaranteed trade deal with the US, another boost for UK stocks.

London bias means the FTSE 100 doesn’t reflect the regional nature of the UK plc

Many of the FTSE 100 companies are based in London, which often functions as a microeconomy distinct from the rest of the UK. This means that the performance of FTSE 100 companies is often unaffected by regional factors, such as employment conditions and local economic growth outside the capital.

The UK’s economy is also much more diverse than the FTSE 100, which is dominated by large multinationals. Small and medium-sized enterprises (SMEs) form the backbone of the national economy.

According to the Federation of Small Businesses (FSB), SMEs account for 99.8% of the business population, as well as three-fifths of employment and half the turnover in the UK’s private sector.

This shows that SMEs are the primary drivers of UK business performance.

FTSE 100 companies tend to be concentrated in specific industries with global reach and multinational supply chains, whereas SMEs are a more accurate representation of the UK’s diverse business community.

The FTSE 100 is particularly sensitive to external factors that can influence market trends

Often, just a slight shift in political or economic activity can spook investors or, conversely, boost their optimism. This makes the markets highly vulnerable to a range of factors, all of which can impact the FTSE 100’s performance, for better or worse.

These include:

• • Interest rates. These affect borrowing costs and consumer demand, and higher rates tend to have a negative effect on the FTSE 100.
  • Political interventions. Elections and central government policy changes can create market uncertainty or boost optimism, with investor confidence easily swayed by these factors.
  • Corporate earnings. When large FTSE 100 companies release earnings reports, share prices can shift dramatically, especially if results are significantly above or below expectations.
  • Sector performance. As the FTSE 100 is heavily weighted towards specific sectors, such as finance, energy, and healthcare, shifts in these areas can affect its performance.
  • Commodity prices. As energy firms are a major part of the FTSE 100, rising commodity prices can, in turn, lift the value of stocks, boosting the index’s overall performance.

Essentially, the FTSE 100 is simply one part of the UK’s economy, focused on a narrow set of companies and sectors.

A strong economy doesn’t always translate into a strong FTSE 100, and equally, a weak economy is not always reflected in the index’s performance.

Get in touch

If you’d like to find out more about investing, we’re always keeping a very close eye on the market’s performance. Please email us at info@harperlees.co.uk or call 01277 350560 to find out more, and we’ll be very happy to help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.