Up 17% this year, here’s why the FTSE 100 could do the same in 2026

It has been a fantastic year overall for the UK stock market. The FTSE 100 index is up 17% so far in 2025, with just a couple of weeks left to go. When I look at the fundamental reasons for the rally, there’s a compelling argument to be made as to why 2026 could offer more of the same, with some specific stocks that could even outperform the index.

Looking on the bright side

Even after gains in 2025, the FTSE 100 remains cheap relative to global peers. A good example of this is the price-to-earnings ratio for the index versus the S&P 500. At 18.2, the FTSE 100 is significantly cheaper than the 30.83 figure for the US stock market. Therefore, it could continue to rally in the coming year as investors see it as undervalued.

Another factor is further interest rate cuts from the Bank of England’s committee. The team is widely expected to reduce the base rate by 0.25% tomorrow (18 December). Next year, analysts are pencilling in at least two more rate reductions. This should help the FTSE 100 rally. This means businesses can borrow money at lower rates, helping to fuel growth. It also reduces the incentive for people to keep money in savings accounts. Investors then likely look for places to hunt higher returns, such as the stock market.

Finally, even if the global economy underperforms or people get spooked by US midterm elections, trade tensions or other factors, the FTSE 100 could still do well. It’s home to many defensive stocks from sectors like utilities, telecoms and consumer staples. Investors tend to buy these shares when they get worried.

A case in point

One example of a stock that could be considered is SSE (LSE:SSE). The stock is up 28% over the past year, helping to guide the index higher. Yet it can also be seen as a defensive stock.

It makes money via transmission of electricity to end users, along with a growing renewables arm with elements like offshore wind farms. It has done well in the past year because in a volatile macro environment, investors have looked towards companies with predictable returns. SSE has ticked this box due to having long-dated earnings visibility.

Looking forward, it’s working on a multi-year capex plan focused on networks and renewables. In theory, this should ultimately translate to higher earnings further down the line, which is why investors like it. Further, even if next year brings volatility, SSE should see fairly constant demand, as the utilities it provides are essential to many. Therefore, it could do well (and help the FTSE 100 as a whole) even if 2026 offers a bumpy road.

But there are risks as it’s at the mercy of the regulator in terms of price caps or other restrictions. As a result, this could hamper it in the future, depending on what changes are made.

Even with those concerns, I think it’s a stock for investors to consider as part of a play for further gains in the UK stock market next year.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.