The performance of the UK stock market is polarized! The prospects of domestically oriented companies are worrying.

Notice that the UK FTSE 100 index may be hitting record highs, but the impact of the Labour government's budget is manifesting in a series of weak trading updates, with the impact likely concentrated on domestically oriented stocks. The reason for the record highs is that with the depreciation of the pound, the foreign income of some large companies is increasing their profits. However, the main FTSE 250 mid-cap index is still far below its peak, as some of the largest high street companies are struggling to cope with Chancellor Rachel Reeves' tax hike plans. As the reporting season begins, the UK's largest supermarket Tesco and Marks & Spencer Group Plc have stated that due to wage tax increases and uncertain economic prospects, costs are rising. Competitor J Sainsbury Plc has stated that it will have to delay planned pay rises. Next Plc, which operates hundreds of clothing and home goods stores in the UK, has already raised product prices slightly. Emma Mogford, fund manager at Premier Miton Investors, said, "We believe the outlook for the upcoming reporting season is mixed. The market environment still favors larger, stronger companies." For the FTSE 100 index constituents, analysts' general expectation is for earnings in 2025 to grow by around 6%, while the overall forecast for the European market is 8%. Since Reeves released the budget in October, analysts have been downgrading their forecasts for the UK market, while the Citigroup index shows that forecasts for other European regions have stabilized since the beginning of the year. Despite last week's weaker-than-expected inflation data providing some relief for UK assets, the FTSE 250 index, which includes more companies focused on the domestic market, remains around 5% below its summer high. Goldman Sachs strategist Sharon Bell said, "Mid-cap stocks are being hit by continued weakness in the domestic economy. PMI data shows that a significant downturn in the short term is unlikely." This makes UK stocks look cheap. Price-to-earnings ratios show that the broader FTSE 350 index is 15% lower than the STOXX Europe 600 index and nearly 50% lower than the S&P 500 index. Goldman Sachs strategists said recent price movements indicate that much of the downside has already been priced in. A closer look at individual industries reveals even lower valuations. The price-to-book ratio for the Bloomberg UK Residential Construction Index is below 1, which roughly means that investors believe the industry's value is lower than the value of its land holdings. With government bond yields climbing, swap rates used to price mortgages remain above 4%. This hinders the recovery of housing demand, even after good news on inflation this week. Investors will closely watch the Bank of England's decision, with the market expecting a 25 basis point rate cut in February. Meanwhile, recruitment company Pagegroup Plc lowered profit expectations, while Robert Walters Plc warned that fourth-quarter performance would be below expectations, with both companies citing low confidence among clients and job seekers. Hays Plc also issued a similar update. According to a report by the Recruitment and Employment Confederation and KPMG, the rate of decline in recruitment by UK businesses is the fastest in 16 months. The uncertain profitability and economic outlook in the UK explain why the UK market has lagged behind the European continent for many years. In local currency terms, the FTSE 100 index has only increased by half of the blue-chip European STOXX 50 index over the past decade, and the latest weak economic data indicates that the Labour party will struggle to revive economic growth. However, in January, the pound fell by 2.4%, with about 75% of the income of index members coming from outside the UK this year. Rajeev De Mello, Global Macro Portfolio Manager at Gama Asset Management SA, said that the FTSE 100 index's "international influence benefits from its undervaluation, high dividends, and pound weakness." At the same time, "more domestic market sectors will continue to face pressure. The sharp rise in UK government bond yields is a negative factor," he said.