Investing.com -- The FTSE 100 , the UK’s leading stock index, has seen a strong upward trend, reaching an all-time high of 8,871.31 on March 6, 2025. The index has made year-to-date gains of 7% in local currency terms, according to Lale Akoner, Global Market Analyst at eToro.

Akoner attributes the surge to several key factors, including gains in the defense and banking sectors. Increased military spending across Europe, spurred by geopolitical tensions, has resulted in a significant increase in defense stocks. For instance, BAE Systems (LON: BAES ) and Rolls-Royce (OTC: RYCEY ) Holdings saw their stocks rise by over 40% year-to-date.

The banking sector also contributed to the index’s rise, with an 18% increase year-to-date. Akoner noted that UK banks are insulated from tariffs and are being supported by the Bank of England’s (BoE) rate cut cycle.

The market’s momentum has also been sustained by expectations of further rate cuts from the BoE. Despite concerns about inflation, investors are optimistic that monetary easing will continue to provide a boost for equities. This stance contrasts with the Federal Reserve’s policy, which paused its rate cutting cycle due to inflationary pressures from the Trump administration’s tariffs.

However, Akoner cautioned that while the FTSE 100’s recent gains are backed by strong sectoral performance and macroeconomic factors, risks still exist.

The ongoing Russia-Ukraine conflict and shifting US trade policies could introduce volatility into the market. While defense spending is currently driving market growth, any escalation in the conflict or unexpected policy changes could alter the market outlook.

Additionally, the latest UK Services PMI has dropped to 51, indicating a slowdown in a key sector. If economic data continues to weaken, it could shake investor confidence. Despite the current optimism around rate cuts, persistently high inflation could force the BoE to adopt a more hawkish stance, which could negatively impact equity markets.

In conclusion, the FTSE 100’s strong start to 2025 has been supported by attractive valuations compared to the US, sectoral strength from defense and banking sectors, and expectations of continued monetary easing. However, the sustainability of this rally will depend on geopolitical risks, trade policy shifts, and economic data in the coming months.

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