FTSE 7,000 in 2010 ?

The FTSE 100 index could climb as high as 7,000 next year, according to new analysis based on future earnings by popular financial website The Motley Fool - Fool.co.uk.

Although some of the UK's biggest companies have recently reported massive losses, London shares could rebound strongly in 2010 as company profits recover.

Banks slumped to a collective loss of £15 billion in 2008
Miners profits fell 40% in 2008
Losses trebled at REITs on asset write downs in 2008

Collectively, the most recently reported profits of FTSE 100 companies were some 60% lower than a year ago. It is calculated that total annual profits of FTSE 100 companies plunged from £130 billion to around £48 billion.

However, profits at FTSE 100 companies could now grow strongly as bank earnings recover and asset values at Real Estate Investment Trusts stabilise. Elsewhere, miners may see significant improvements in their bottom lines. As a group, FTSE 100 companies are forecast by analysts to report profits of £115 billion for 2009, rising to £149 billion in 2010.

Undervalued shares

Currently, FTSE 100 companies are worth around £1.5 trillion. As such, they are valued at 34 times historical profits and 13 times prospective profits for 2009. Looking further ahead, FTSE 100 shares are valued at just 10 times forecast profits for 2010.

A re-rating to between 12 and 14 times forward earnings for 2010 could see the valuation of FTSE 100 companies increase to between £1.8 trillion and £2.1 trillion by the end of next year.

The FTSE 100 has recently traded at around 5,000 points. So an upward revaluation of London shares of between 20% to 40% would lift the benchmark index to between 6,000 and 7,000 points.

David Kuo, Director at the Motley Fool, says: "For many people the economy will look ghastly in 2010. This is especially true for the millions who find that their jobs are redundant and for businesses whose performance was flattered by a diet of cheap credit.

"Nevertheless, when corporate earnings stabilise there will be room for shares to move higher. Moreover, as investors regain their appetite for risk this could translate into higher valuations resulting in a period of high equity returns.

"It is surprising how even a small re-rating of shares on the back of an appetite for risk can boost the benchmark index. It will also surprise some people that profits for 2010 are forecast to be 15% higher than those reported for 2007.

"This increase in profits is certainly not guaranteed, so investors should not bet the farm on equities. If the economic downturn has taught us anything, it is that you should only put all your eggs in one basket if you like omelettes."