Capital Economics sees limited upside for FTSE 100 in 2017 (and 2018)

The UK economy's performance will continue to exceed forecasts but multiple headwinds will just about brake any further gains in the FTSE 100 in 2017, analysts at one of the City's top research shops said.

For starters, the kick from weaker Sterling had likely already run most of its course, analysts at Capital Economics said in a research note sent to clients. Indeed, their expectation was that the pound would continue strengthening as the economy kept surprising positively and the prospect of tighter monetary policy began to loom closer on the horizon.

So isn't the economy supposed to continue exceeding forecasts then? Yes, said analyst Andrew Wishart, but what matters are positive surprises and those would be smaller going forward as consensus had revised up its forecasts already.

The analyst expected the top flight index would close out 2017 at 7,500 points and that any further advance would be limited.

Wishart also believed the S&P was set to tread water in 2017 and 2018 from current levels, as corporate profit margins on the other side of the Pond got squeezed by the tighter US jobs market.

Given the tendency of global stock markets to move in a synchronised fashion, that would be a drag on the Footsie.

Meanwhile, rising real (inflation-adjusted that is) yields on Gilts would raise the bar on the earnings yield that investors required in order to hold shares.

The Bank of England was set to tighten policy earlier than markets were expecting, Wishart said, and it would have just that effect.

"The upshot is that, with the factors that have supported the stock market’s strong run over the past year now fading, and a rise in real yields imminent, we see little scope for further gains in the FTSE 100."