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UK growth stocks are enjoying a handy run right now. The FTSE 100 is up 20% over the past year, with dividends on top. By contrast, the S&P 500 has risen just 15%, and US stocks generally pay less income too.
As a natural contrarian, I’d normally assume the good times won’t last. But this time, I think there may be more to come. I’m not talking about the short term, because what markets do over weeks or months is anybody’s guess. I’m thinking five or even 10 years ahead.
My optimism may grate when the UK economy is barely growing, inflation remains sticky, unemployment is ticking up and confidence is in the doldrums. Yet I see three things that could lift the mood.
Lower interest rates
Analysts including ING and Capital Economics expect inflation to fall to 2% this spring. That’s bang on the Bank of England’s target and would open the door to base rate cuts, possibly down to 3%. That would give the economy a lift and could push more savers into shares in search of better returns.
Energy may get cheaper
Few things defined the cost-of-living crisis more than our soaring gas and electricity bills. Gas spot prices have spiked in the cold winter, but longer-term prices have barely moved. Oil has rallied to $67, yet the International Energy Agency warns of a supply glut as demand cools. Time will tell.
Expansionary policy
Donald Trump’s One Big Beautiful Bill is expansionary, and the US Federal Reserve is still buying $40bn of bonds a month. More US rate cuts will come at some point too. It’ll all help.
There’s another potential catalyst. Artificial intelligence is already showing early signs of boosting workplace efficiency. If it delivers on that promise, it could finally crack the productivity problem that has plagued Western economies for decades.
Of course, I could be wrong. AI could turn out to be a disastrous bubble. Inflation might prove stubborn. Energy prices could rebound. Geopolitical shocks lurk everywhere. But pessimism is so deep that the contrarian in me suspects things may turn out better than feared.
If I’m right, this could be a once-in-a-decade opportunity to buy UK growth stocks before they take off.
JD Sports shares may fly one day
I’ve been adding to JD Sports Fashion (LSE: JD) in anticipation. The self-styled ‘King of Trainers’ has had a miserable run, its shares halving over the past three years. They’ve shown signs of stabilising, up 3.8% over the last year, but damage remains severe. The cost-of-living squeeze has hit demand, key partner Nike has struggled, and tariffs haven’t helped.
Sales fell for a third Christmas running in the UK and Europe, but edged up 1.5% in North America, which now accounts for 40% of JD’s revenues. The business is also set to generate £400m of free cash flow and may launch another share buyback.
The valuation looks nonsensically cheap to me, with a price-to-earnings ratio of just 6.8. I’ve noticed that when sentiment picks up, JD Sports has a habit of moving faster than the wider market.
There’s still plenty that could go wrong as consumers and Nike struggle on. But with a five-year view, I think it’s well worth considering. Now let’s see if my rosy scenario plays out.
