Why FTSE 100’s 23% Rally Could Crumble Under New US Tariffs

• FTSE 100 is up >23% YoY but slipped 0.07% on the day.
• US announced a 10% global tariff regime, reviving trade tension.
• AI disruption fears are adding a hidden earnings drag.
• Key winners: Convatec (+11%), Croda (+4.3%); laggards: Rentokil (-2.9%), Standard Chartered (-2%).
• UK 10‑yr gilt yields fell to 4.30%, the lowest since Dec 2024, hinting at softer financing costs.

You’re missing the silent storm that could topple FTSE 100’s rally.

Why FTSE 100’s Recent Gains Are Under Threat

The FTSE 100 closed the previous session at 10,684.74 and traded in a narrow band today, ending at 10,677.48 – a marginal 0.07% dip. On the surface, that looks trivial, but the index is perched on a 23% gain over the past 12 months, a performance that outpaces many global peers. Such a steep climb creates a fragile base; any macro shock can trigger a sharp correction. Investors often forget that a rally of this magnitude attracts profit‑taking, especially when fresh risk factors emerge.

How the New US 10% Tariff Regime Is Pressuring UK Stocks

Effective Tuesday, the United States rolled out a 10% tariff on a broad basket of imports, reigniting trade‑war anxieties. The UK, heavily intertwined with EU and US supply chains, feels the ripple instantly. Export‑oriented firms—think chemicals, industrial packaging, and utilities—see margins squeezed as input costs rise. The tariff also forces multinational corporations to reassess pricing power, potentially delaying capital‑expenditure plans. Historically, similar tariff spikes in 2018 caused a 4%‑6% pull‑back in the FTSE 100 within weeks, a pattern worth watching.

AI Disruption: Hidden Drag on Corporate Earnings

Beyond tariffs, a quieter but equally potent threat looms: AI‑driven productivity shifts. While AI promises long‑term upside, the short‑run transition can erode earnings. Companies that rely on legacy processes—particularly in traditional manufacturing and utilities—face higher automation costs and the risk of obsolescence. Analyst surveys show that 38% of UK‑listed firms expect a temporary dip in profitability as they integrate AI tools, a sentiment that is already seeping into market pricing.

Sector Winners and Laggards: Who’s Leading the Pack

Despite the headwinds, certain stocks are defying the gloom. Convatec Group surged over 11% after announcing higher revenue and an upgraded outlook, highlighting demand resilience in medical devices. Croda International rallied 4.3% on strong specialty chemicals earnings, while Mondi added 2.8% thanks to robust packaging demand in emerging markets.

Conversely, defensive names slipped. Rentokil Initial fell 2.9% as pest‑control contracts faced price pressure, while Standard Chartered dropped over 2% amid concerns over its exposure to Asian trade routes. Lloyds Banking Group, Fresnillo, and Barclays each slipped around 1.5%, reflecting broader concerns about corporate credit quality.

Currency and Yield Movements: What They Mean for Your Portfolio

The dollar index nudged higher to 97.87, lifting the six‑currency basket. The GBP/USD pair edged down to 1.3487, indicating a modest weakening of sterling. Meanwhile, the EUR/GBP slipped to 0.8736, and the GBP/JPY rose 0.81% to 210.29, reflecting yen weakness. For UK investors, a softer pound can boost overseas earnings when converted back, but it also raises import costs—a double‑edged sword.

On the bond side, UK 10‑year gilt yields fell 0.35% to 4.30%, their lowest since early December 2024. Lower yields ease financing pressures for corporates, potentially supporting equity valuations, but they also signal market expectations of slower growth or a forthcoming rate cut. The divergent yield paths—hardening in the US, softening elsewhere—highlight a fragmented global monetary environment.

Historical Parallel: Past Tariff Shocks and Market Recovery

Looking back to the 2018 US‑China tariff escalation, the FTSE 100 experienced a 5% dip over three months before rebounding. The recovery was driven by a combination of corporate earnings resilience and a dovish pivot by the Bank of England. However, the rebound was not uniform; sectors directly hit by tariffs (e.g., automotive, aerospace) lagged, while consumer‑focused firms recovered faster. The lesson for today’s investors is to isolate sector exposure and monitor policy‑driven earnings revisions.

Investor Playbook: Bull vs Bear Scenarios

Bull Case: If the tariff regime stabilizes and AI integration proves less costly than feared, the FTSE 100 could resume its upward trajectory. Winners like Convatec and Croda may act as catalysts, pulling the index higher. A continued decline in UK gilt yields would also support equity valuations, making growth stocks more attractive.

Bear Case: Should the US expand tariff coverage or if AI disruptions cause wider profit warnings, the index could face a 3%‑5% correction. Currency depreciation would exacerbate cost pressures for import‑heavy firms, and the lingering geopolitical tension could spur risk‑off flows into safe‑haven assets, further weighing on equities.

Strategically, consider allocating a modest portion of your portfolio to high‑conviction winners that have already demonstrated earnings resilience, while keeping a defensive buffer—perhaps in utilities or consumer staples—that can weather tariff volatility. Stay vigilant on macro indicators: US tariff announcements, AI adoption timelines, and UK yield movements will be your early warning signals.