UK stocks are beating Wall Street — but the Iran war is putting the winning streak at risk

London-listed equities have extended their outperformance versus the U.S. into 2026 after a stellar 2025 – but cracks are beginning to show as the war in Iran drags on.

The FTSE 100 index, home to shares of the U.K.’s most valuable listed companies, has gained around 5.3% so far this year, putting it ahead of all three of Wall Street’s major averages and building on its 2025 momentum.

In 2025, the FTSE 100 surged 21.5%, outpacing all three of New York’s biggest indexes.

Alessandro Dicorrado, head of value at Ninety One, told CNBC in an email on Wednesday that U.K. indices offered a “striking” breadth of opportunity, from “HALO” sectors such as energy, mining, utilities and industrials — seen as more resilient to disruption — to asset-light software and data businesses.

Russ Mould, investment director at AJ Bell, agreed that the U.K. market has several facets working in its favor, many of which “have been arguments against investing in it, or at least in favor of underweighting it, for much of the past decade.”

“Just under a fifth of [the FTSE All-Share index’s] market cap (and earnings and dividends) come from miners and oils,” he said in an email, noting that with another fifth of the index being comprised of healthcare and consumer staples firms, it offered “a lot of defensive ballast.”

“As such, the U.K. is a good hedge against current geopolitical risk and concern over supply chain and raw material availability, as oil prices stay high, gold prices hold firm and some industrial metals set new peaks.”

Another thing luring investors to the U.K. market is lucrative cash returns offered by its constituents, Mould said, via a combination of ordinary dividends, special dividends and share buybacks, as well as takeover payouts.

“The total cash returned to investors via these mechanisms was around £180 billion in 2025 and analysts’ forecasts for dividends, buyback announcements and live takeovers already put that total at around £130 billion, or 4.6% of the total market cap [for 2026],” he said. “As a cash yield, it beats the Bank of England base rate and inflation, while it is not too far short of the 10-year gilt yield.”

“The U.K. has been unloved, and has underperformed for a long, long time, so it may offer better value than the U.S., which has been lauded as the only option in town for a long time and has outperformed as a result.”

But the London market continues to face the longstanding issues that have made it unpopular in market environments less suited to its defensive attributes. These include shallower pools of local capital than the U.S., an exodus of companies frustrated with lackluster stock price momentum, few quoted tech firms and high listing costs.

Last year was something of a comeback for London’s equity market, which benefited from the trend for geographical and sectoral diversification as unpredictable White House policy shook global markets.

The past decade has seen London’s benchmark index outperform the S&P 500, Nasdaq Composite and Dow Jones Industrial Average just three times on an annual basis. While the U.S. indexes rallied in the immediate aftermath of the Covid-19 pandemic in 2020, the FTSE 100 ended the year in negative territory, and political upheaval in the wake of Brexit also took a toll on international confidence in the U.K. as an investment destination.

And U.S. indexes have outperformed London’s FTSE 100 since the Iran war began in late February, a shift Jonathon Marchant, a fund manager at Mattioli Woods, labeled “surprising.”

“This is likely due to the specific nature of the conflict, with the U.S. being more insulated from energy shocks, given significant internal supply,” he said, adding that U.S. performance has also been bolstered by a stronger dollar.

In March, the U.K.’s inflation rate jumped to 3.3% as fuel prices surged in the wake of the Iran war, data published this week showed. The U.K. is a net energy importer that sources around 40% of its fuel from overseas, making it more vulnerable to volatility in global energy markets than the U.S., a net exporter of energy. Oil and gas prices have surged since the war in Iran began, thanks to the destruction and closure of energy infrastructure and the effective closure of the Strait of Hormuz, a critical shipping route.

The U.K. has also faced domestic political and economic problems. But market watchers seemed unperturbed by mounting pressure on the British economy.

Ninety One’s Dicorrado said that despite economic and political turbulence gripping Britain, the U.K. market “presents a more nuanced picture than the domestic backdrop might suggest.”

He added that a large proportion companies listed in London are headquartered outside of Britain or operate on a global scale, with as much as 75% of FTSE 100 earnings coming from overseas.

“While consumer-facing sectors remain under pressure from high energy costs and elevated mortgage rates, the equity market itself is highly international, with many companies generating the majority of their revenues overseas,” he told CNBC.

Marchant said the U.K. also benefits from a compelling valuation backdrop. What comes next, he said, may depend on whether U.S. President Donald Trump can make a deal with Iran to stop the war.

“There could be renewed interest in markets outside of the U.S., including the U.K., should the conflict prove short-lived,” he said.

Toni Meadows, head of investment at U.K.-based BRI Wealth Management, told CNBC that global investors were missing opportunities in London’s markets.

“To quote Shakespeare, ‘the truth will out’ and in market terms truth is always valuation based on value for money,” he said.

“To a large extent, global investors could, and have, ignored the U.K. market entirely, but that has meant they have been blind to the value or valuation opportunity in U.K.-quoted companies, and to change the quote ‘value will out’ at some point.”

However, Meadows noted that years of U.S. tech dominance had seen the British stock market shrink in relative importance, and that a resumption of this trend could mean the U.K.’s outperformance is short-lived.

“Last year was the first year in many that the U.K. actually outperformed the U.S., partly due to a return of interest in older sectors and partly as global and American investors diversified, but this was led by the FTSE 100 and not the more domestic indices,” he said.

“For the U.K. to maintain its outperformance we need investors to look for value in the mid-cap and smaller companies and as yet that doesn’t seem to be happening on a sustained basis, even if the value is there.”