From tariff turmoil to conflict in the middle east, there’s been a lot for companies to navigate over the last few months.
Meanwhile we’ve recently seen the FTSE 100 hit the 9,000 high water mark for the very first time.
So, with the summer earnings season kicking off, here’s what it all means for three of the FTSE 100’s biggest sectors and highlight one stock to watch in each.
FTSE 100 Index
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Banks
UK banks have rightly seen a seismic sentiment shift over the past couple of years, as the sectors benefited from higher interest rates and proven much more resilient than once feared.
Structural hedge repricing should continue to be a sector tailwind into half year results, as investments made during lower rate periods are reinvested at more attractive yields.
This isn’t small fish either, with some estimates pointing to an additional £13bn of annual income across Barclays, Lloyds and NatWest.
Credit quality improvements bolster the sector’s outlook, with non-UK lending significantly reduced and UK loan metrics showing resilience, even in tough economic scenarios.
We think Lloyds is one of the standout names in the sector, offering a blend of strong underlying performance and potential upside for those willing to take on some risk.
It’s an important month, not just because of next week's half-year results, but also because the Supreme Court is expected to make a judgment on the motor finance case.
Lloyds has already taken £1.15bn in provisions and analysts expect around another £800mn over 2025, with some pencilling in another tranche next week.
Lloyds has around a 14% share of the motor finance market, making it more exposed than most of its peers, so investors will be keeping a close eye on how this develops.
We’re expecting strong underlying performance, and if coupled with a favourable outcome from the motor finance investigation (hence the additional risk), the valuation looks relatively attractive – though there are no guarantees.
Defence
UK defence companies have seen demand for their products increase in recent times due to rising geopolitical tensions. This surge in demand has buoyed valuations across the sector, with markets forecasting continued growth and increases in government spending.
Those expectations were further justified in June, as NATO allies agreed to increase their defence budgets from 2% to 5% of GDP over the next decade. As much as 3.5% of that will be earmarked for equipment – things like fighter jets, submarines and ammunition.
This represents a massive opportunity for defence companies. The increase from 2% to 3.5% in Europe implies an additional $330bn of annual spending. With UK companies expanding their footprints and securing international contracts, many look well-positioned to capture some of this extra spending.
BAE Systems is one of those UK companies. The group had a strong start to 2025, giving management the confidence to reiterate its full-year guidance, expecting sales to rise between 7-9% from last year’s £28.3bn.
While it might be too early to see an upgrade to this figure in next week’s first-half results, we do expect sales to land towards the top end of this range.
The group has a diversified customer base and portfolio of defence equipment, which is tilted towards long-duration items like submarines and aircraft. These are the type of items where demand is increasing and suppliers are few, so expect management to allude to this favourable dynamic.
We’re also expecting to hear that the order backlog, which stood at a mammoth £77.8bn last we heard, has risen to new record highs. With the group trying to make inroads into this backlog, first-half cash flows might have seen some pressure, but should recover in the second half. Of course there can be no guarantees.
Oil & Gas
Up until the Israeli and US attack on Iran’s nuclear development facilities oil prices had been steadily trending downwards this year. The military action prompted a temporary spike and while prices haven’t come all the way back down, they’re still some way below the peaks seen earlier in the year.
That presents something of a dilemma for oil companies, where we think investor sentiment is heavily driven by the sector’s ability to return cash to shareholders.
However, current oil price levels are putting the industry under real pressure to meet market expectations of dividends and share buybacks.
Shell is better placed than most to ride out peaks and troughs in the cycle, with one of the stronger balance sheets among the oil majors and an ambitious cost cutting program. But if prices remain weak for a prolonged period, blindly ploughing on with buybacks of over $3bn per quarter will erode the strength of the balance sheet.
The second-quarter results are also likely to see a negative impact from lower production, a fire at one of its chemical plants, and weak results in its commodity trading operations. That could put cashflow under some pressure.
But while there can’t be any certainty on shareholder payouts, we don’t think Shell will trim its distribution levels next week. That might see debt levels start to creep up. So, investors will be hoping guidance will point to improving oil and gas production in the third quarter, as well as better plant utilisation in the chemicals division.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
