FTSE 100 flat as Tesco, AB Foods disappoint; BAE jumps on Trump defense plan

London's blue-chip index barely moved as weak retail updates offset a surge in defense stocks after the U.S. president called for a $1.5 trillion military budget.

London's FTSE 100 barely moved Thursday as weak updates from Tesco and Associated British Foods offset a surge in BAE Systems after Donald Trump called for a massive defense spending increase.

The FTSE 100 index closed down just 3.52 points at 10,044.69. The FTSE 250 index ended up 11.49 points, 0.1%, at 22,892.30, and the AIM All-Share index closed up 3.27 points, 0.4%, at 784.85.

Tom Stevenson, investment director at Fidelity International, remains "optimistic but cautiously so". "There's certainly a good case to be made for another year of decent returns, but it would be prudent not to expect another 20% year, and to put some protections in place," he added. Mr Stevenson said: "The good news is that corporate earnings, the main driver of stock market returns over time, are looking robust. After dipping around the time of the tariff announcement in April, earnings growth expectations are back into double digits for both this year and next."

On a mixed day for London's blue chips, trading updates from several leading retailers took centre stage. The UK's biggest retailer Tesco fell 6.7%, dragging peer J Sainsbury, which updates on trading on Friday, down 2.3%, after third-quarter sales fell short of expectations. For the third quarter, which is the 13 weeks to November 22, Tesco said like-for-like sales excluding VAT and fuel for the group were up 3.1% on-year, with 3.9% growth in the UK. Group sales were below company compiled consensus of 3.6%, with UK performance below 4.1% expectations. Manjari Dhar, analyst at RBC Capital Markets, said third-quarter sales were a "little softer than consensus expectations" largely owing to "softer performances from Booker… and Central Europe". Over the subsequent six weeks to January 3, including the key Christmas period, the Welwyn Garden City-based food retailer said like-for-like sales excluding VAT and fuel rose 2.4% compared with a year ago. Like-for-like sales on the same basis were up 3.2% in the UK and 3.8% in the Republic of Ireland. Sales were down 2.1% at Booker and 0.8% higher in Central Europe. "Competition is as intense as ever," said Tesco chief executive Ken Murphy. Tesco expects to deliver financial 2026 group adjusted operating profit at the upper end of its £2.9 billion to £3.1 billion guidance range issued in October. But Monique Pollard, retail analyst at Citi, said "consensus (and we believe investors) are already there". "These numbers are not a disaster," but a "more than doubling in the share price from the 2022 lows means the company will be judged more harshly for the slightest misstep," said AJ Bell analyst Russ Mould.

Associated British Foods led the FTSE 100 fallers, plunging 14%, after a profit warning. "We now expect group adjusted operating profit and adjusted earnings per share to be below last year," the London-based company said in an unscheduled trading update. In November, AB Foods, which owns retailer Primark and a range of food manufacturing businesses, said it expected to deliver growth in adjusted operating profit and adjusted EPS in the current financial year. JPMorgan analyst Georgina Johanan said AB Foods faces "trouble on several fronts". She said the profit warning was driven by a combination of weaker-than-expected sales in Primark Europe, significantly higher markdowns as a result of the softer top line and a mixed performance in the food business. As a result, Ms Johanan expects high single digit percentage downgrades to financial 2026 pre-tax profit consensus expectations.

But Marks & Spencer fared better, rising 5.0%, as its festive trading update provided a mixed bag, with its food offering leading the charge, but a cyber attack hit hurting its fashion, home and beauty division. M&S maintained its annual outlook, something Deutsche Bank deemed "reassuring" and supporting shares. Peel Hunt observed a "game of two halves" with the M&S Christmas. "Food was strong against tough comps, but non-food continues to feel the impact of the cyber attack," Peel analysts said.

Back in London, defence stocks rallied after Donald Trump said he wanted to increase the US defence budget by half next year to a giant 1.5 trillion dollars to deal with "troubled and dangerous times". "I have determined that, for the Good of our Country, especially in these very troubled and dangerous times, our Military Budget for the year 2027 should not be USD1 Trillion Dollars, but rather USD1.5 Trillion Dollars," Mr Trump said on Truth Social. The US is already by far the world's biggest military spender, and a hike to 1.5 trillion dollars would push Washington's financial outlay on its armed forces even further ahead of its rivals China and Russia. The move rippled through North American defense sectors, where BAE's U.S. subsidiary is a major contractor. In response, shares in BAE Systems jumped 5.0%.

Banks also fared well, with NatWest up 1.9%, Lloyds Banking Group up 1.2% and Barclays up 1.1%. Bank of America said the operating environment remains supportive for the banking sector, with stable swap rates, unemployment and deposit trends. The broker raised price targets for all three UK high street lenders, with Barclays remaining its top pick.

Shell fell 3.7% as its trading update failed to match hopes. "We thought Shell's trading update… was disappointing, with a number of additional charges to earnings and cash flow impacting 4Q estimates," analysts at RBC Capital Markets said.

Brent oil traded at 61.12 dollars a barrel at the time of the London equities close on Thursday, up from 60.37 dollars late on Wednesday. Gold was little changed at 4,457.01 dollars an ounce at Thursday's close, against 4,458.54 dollars on Wednesday.

The biggest risers on the FTSE 100 were Coca-Cola HBC, up 206 pence at 3,918p, BAE Systems, up 97p at 2,023p, Marks & Spencer, up 16.3p at 344.8p, Endeavour Mining, up 172p at 4,098p, and Whitbread, up 55p at 2,618p. The biggest fallers on the FTSE 100 were Associated British Foods, down 301p at 1,850p, Tesco, down 30.5p at 422.1p, Shell, down 93.5p at 2,562p, Croda, down 71p at 2,655p, and Glencore, down 9.8p at 413p.

Friday's local corporate calendar has a trading statement from food retailer J Sainsbury. Friday's global economic calendar has China inflation data overnight, US jobs data, including nonfarm payrolls and unemployment figures, Canada unemployment numbers and a eurozone retail sales report. Canadian investors watching global markets also digested mixed U.S. index performance and rising Treasury yields.