Key Takeaways
- Investors will be closely watching the Autumn Budget for sector-specific tax increases.
- Financials and defense stocks have performed well this year, and analysts expect this trend to continue.
- UK healthcare stocks are faring better than expected under the new US pharma tariff regime.
The FTSE 100 started the fourth quarter of 2025 by hitting a record high above 9,400 points, helped by a sizable move in the UK’s largest stock, AstraZeneca AZN.
This continued a positive trend for UK stocks this year, with the UK index moving above 9,000 points for the first time in Q3 and posting year to date gains of around 19%.
The Morningstar UK Index has returned 18.3% year to date in pounds, marking its best nine months of the year since 2009, when it rallied 21.81%. Financials and defense stocks have helped maintain the market gains.
This gain puts the UK index on a par with the Morningstar Eurozone Index, which is up by around 18% in euros, but ahead of the Morningstar US Market Index, which is up around 15% in dollars in the year to Oct.1.
Here fund managers and analysts give their views on where they see the opportunities, and the risks, in the final quarter of 2025.
How Will Rachel Reeves’ Autumn Budget Impact UK Stocks?
The Autumn Budget on Nov. 26 is the key date that stock and bond investors are watching. At the recent Labour party conference, Chancellor Rachel Reeves hinted of incoming tax rises. Just weeks ago, there was speculation about Reeves’ own future in the government while the departure of the deputy prime minister, Angela Rayner, only further heightened UK political risk.
Douglas Scott, portfolio manager of the Aegon Global Equity Income Fund and the Aegon UK Equity Fund which both have Gold Medalist Ratings, says that much of the equity performance in the fourth quarter will hinge on decisions Reeves makes to take control of the UK’s finances.
Scott says that the current government has a track record of targeting particular sectors with levies.
Will UK Banks and Financial Stocks Face New Taxes in 2025?
“You have a lot of industries or companies that can suffer a disproportionate amount and others that don’t get impacted,” Scott says.
Speculation is mounting of a tax on gambling companies, and the idea of a levy on banks has not been ruled out. A change to the way UK property is taxed has also been considered.
Scott says the financial services industry could be the focus of government attention this time around.
The Morningstar UK Financial Services Index has posted strong returns of 30% year to date, outpacing the Morningstar UK Index. And Lloyds Banking Group LLOY shares are up 50% so far this year. Currently, three UK banking stocks are trading at fair value, after strong gains this year, while one is trading above its fair value.
James Lowen, co-portfolio manager of the Silver-rated JOHCM UK Equity Income Fund, takes a more relaxed view of the economic outlook.
“[Labour] know that if they don’t sort things out, they’re going to be voted out. But [the overall picture] is not as dire as [it seems]. Corporates and consumers are in a healthy position and we have around £600 billion of deposits at banks."
Lowen also expects the valuation gap between domestically focused UK small and mid-cap stocks to catch up to the prices of large-cap stocks, favoring DFS Furniture DFS, Wickes WIX, and Currys CURY.
Can UK Defense Stocks Keep Rising?
Defense stocks have had a strong run this year across Europe, with the UK’s listed names also benefiting.
Patrick Farrell, chief investment officer at Charles Stanley, has been impressed by the performance of both Rolls-Royce RR. and BAE Systems BA., which have, along with banking stocks, driven UK market returns this year.
“I still favor defense stocks going forward into Q4. There’s still a lot of long-term benefits that these companies can realize in relation to the opening up of the coffers for a lot of European defense contracts,” he says.
With total returns in excess of 100%, Rolls-Royce was the eighth largest contributor to Morningstar UK Index gains so far this year, according to Morningstar Direct data.
Kathleen Brooks, head of research at XTB, favors Rolls-Royce and BAE because defense spending is a long-term theme with momentum beyond this year.
But she says a small downgrade in earnings expectations may be on the cards, due to the pound’s recent strength against the dollar.
After this year’s gains, Rolls-Royce is trading in 3-star territory, and the stock is considered fairly valued.
BAE Systems stock remains undervalued, according to Morningstar analysis.
For Loredana Muharremi, equity analyst at Morningstar, escalating global security concerns, intensified by the war in Ukraine, are driving higher growth in the European defense market.
“BAE is also well aligned with US Defense Department growth programs, from which it derives 45% of its revenue. The military collaboration among Australia, the UK, and the US will benefit BAE, as it is the prime contractor in Australia and the UK and has been selected to build Australia’s nuclear submarine fleet,” she says.
How Will Healthcare Stocks Perform?
UK healthcare stocks are now suddenly in focus for investors: GSK GSK has just replaced its chief executive and AstraZeneca is planning to elevate its New York listing on a par with its primary London listing.
These stocks have gained from recent newsflow on global pharma companies: while the US government announced 100% tariffs on global branded drugs sold by foreign companies in late September, the deadline for that new regime has been postponed, suggesting compromises can be reached with the sector. This optimism was bolstered by a deal between the US government and Pfizer on drug pricing, which helped lift global pharma stocks on Oct. 1; the move higher can be seen in the share chart for AstraZeneca and GSK below.
The UK’s largest stock, AstraZeneca, began the fourth quarter by posting a near-10% gain. The stock is now considered fairly valued after a rise of around 20% so far this year.
Shares in rival GSK are up even further, but are still considered undervalued according to Morningstar metrics.
XTB’s Brooks says that UK healthcare stocks are worth watching in the fourth quarter, because they are well diversified against global shocks, and because the tariffs imposed by US President Donald Trump are less punitive than expected. For example, AstraZeneca has announced USD 50 billion of investment this year in the US by 2030; US investment by global pharma companies was one of the stipulations of the recently announced tariff regime on pharma companies.
She also favors Smith & Nephew SN.. because the medical device manufacturer, like AstraZeneca, can also navigate around the new US regime. The stock has risen nearly 40% this year and is considered fairly valued by Morningstar.
