The FTSE 250 has had a bit of a rough start to the year, falling by almost 6%, or 5% when including dividends. By comparison, the UK’s more popular large-cap index has delivered a total return of 6% since January kicked off. And on the surface, the FTSE 100 appears to be the better choice in terms of performance.

However, despite appearances, the FTSE 250 could deliver some surprising gains later in the year. And one analyst forecast predicts the index could rise as high as 28,300 points by the end of December. That’s a potential 45% surge just around the corner!

The FTSE 250’s cheap

Compared to its long-term annual historical average return of 11%, the UK’s growth index has long been lagging behind. That’s despite earnings growing faster than inflation by around 4% for the last 30 years.

Combining these stronger profits with lacklustre interest from investors has dragged the index’s cyclically adjusted price-to-earnings (P/E) ratio to just 17. For reference, the index’s long-term average is closer to 22. And it goes to show how cheap the index has become over the years. Assuming the index mean reverts back to this average along with continued inflation-beating earnings growth in 2025, the FTSE 250 could enjoy a long-overdue upward correction.

Of course, there’s no guarantee these assumptions come true. With geopolitical tensions and investor uncertainty rising, a flight to safety to more stable indices like the FTSE 100 or commodities like gold may result in the mid-cap index once again underperforming.

However, even if the index itself doesn’t thrive, some of its constituents may still enjoy robust gains.

A potential winner in 2025?

Alpha Group International (LSE:ALPH) only recently joined the FTSE 250 (in June 2024) after climbing through the ranks on AIM.

However, it’s already the 118th largest company in the index as it continues its upward journey to the FTSE 100. And to demonstrate this growth in terms of shareholder gains, the stock’s up over 900% since its IPO in 2017. That’s a 33% annualised return!

Despite this tremendous run, the stock continues to fly relatively under the radar. There are currently only three institutional analysts following this business (each with a Buy or Outperform rating), with an average 12-month share price target of 3,200p versus the current 2,530p share price. And just like its parent index, the stock’s also trading at a seemingly cheap valuation with the forward P/E of just 11.3.

The currency risk management and alternative banking firm is currently facing off against some notable headwinds driven by higher interest rates. Yet that hasn’t stopped revenues and profits from climbing by double-digits. And now that interest rates are steadily falling, demand for its services is expected to rise throughout 2025, accelerating cash flows even further.

Of course, the firm isn’t without its risks. Stubborn inflation could prevent the desired interest rate cuts from materialising. And leadership has also just changed hands with the founder stepping down which could prove disruptive if the new CEO can’t maintain the firm’s momentum.

Nevertheless, despite the risks, it’s a business I remain bullish on. That’s why it’s already one of my largest holdings and why I think investors may want to take a closer look.

Since 2025 kicked off, the FTSE 100 has delivered some fairly strong returns for investors. After factoring in dividends, the UK’s flagship index has jumped 6.1%. That’s more than its 10-year average annual gain of 6%, and we’re only three months into the year.

So can the index keep up the momentum until December? And if so, how much higher could the FTSE 100 go?

FTSE 100 expected to rise

While it may not seem like it, the British economy appears to be off to a good start in 2025. According to Barclays, consumer spending across retail, hospitality, and leisure is actually rising.

In fact, sales of electronic products jumped 6.7% in February – the largest increase since May 2021. And with consumers continuing to follow popular wellness trends, Pharmacy and Health & Beauty retailers enjoyed an even more impressive 8.9% boost over the same period.

Pairing this boost in shopping activity with a fall in inflation from 3% to 2.8% paints a welcome trend of a return towards growth. That’s terrific news for UK shares in general. And should this increased spending activity continue throughout the year, the FTSE 100, along with the FTSE 250, could be primed to deliver greater returns before December comes knocking.

With that in mind, it’s not so surprising that The Economy Forecast Agency has updated its predictions that the FTSE 100 could reach as high as 9,635 points. For reference, the index is currently hovering around 8,580, implying that a further potential 12.3% gain is on the horizon. And that’s before counting the extra yield from dividends.

Of course, forecasts aren’t set in stone. This boost in consumer spending might just be a temporary surge. And if spending were to suffer from here, then the FTSE 100’s progress so far could be reversed.

Not everyone’s currently winning

Despite the strong performance of its parent index, Tesco (LSE:TSCO) is off to a rough start in 2025, falling by almost 11%. The retail giant seems to have missed out on the jump in spending when looking at the macroeconomic data. And that’s not entirely surprising, given that supermarket spending actually fell by 1.1% in February.

That’s a notable downturn from the 1% gain reported in January. Dig deeper into the data reveals that 49% of Britons now shop at budget retailers like Aldi and Lidl. Meanwhile, 67% of consumers are searching for ways to get more value from their weekly shop, and 57% are looking for deals from loyalty discount schemes.

In other words, demand for cheaper Tesco-alternative shopping destinations is going up. And while Tesco’s reporting its next set of earnings later this month, it seems investors are expecting a slowdown.

Of course, this isn’t the first time Tesco has had to navigate through a down period. And with over 23 million members (over 80% of British households) in its Clubcard programme, management has a powerful marketing tool to lure shoppers back in with new deals that consumers are seemingly craving.

Given this powerful competitive advantage and its dominant position within the retail space, this recent sell-off could potentially be a buying opportunity for long-term investors. That’s why I think this FTSE 100 stock is worthy of a closer look.

Since the middle of February, shares in defence company BAE Systems (LSE: BA) have leapt. In fact, in just seven weeks, the BAE share price is up by 30%.

The firm has niche capabilities and a solid order book at a time when defence spending in its core markets looks set to increase significantly.

Taking the perspective of a long-term investor, then, could BAE Systems shares potentially still be worth considering even at the current price?

Valuation looks high to me

The company currently trades on a price-to-earnings (P/E) ratio of 24. That looks high to me, though it is part of a wider trend of large British defence contractors seeing their valuations increase significantly of late. Rolls-Royce, for example, is trading on a P/E ratio of 22.

The BAE share price has tripled over the past three years. By contrast, last year’s revenue was 36% higher than in 2020 and net profit was up by 50% over that period. So, while both of those numbers are impressive, share price growth far outstripped them.

That suggests to me that investors are considering the future outlook for the business when deciding what its shares are worth.

But defence is an industry plagued by cost overruns, changing briefs, and unexpected delays. So trying to understand the future prospects of a business like BAE can end up being a highly subjective activity.

Just one example makes the point: tariffs.

As new research from A J Bell and Bloomberg shows, BAE has 59% of its facilities in the US – and that single market accounts for 46% of its sales. So, shifts in US tariffs could negatively impact BAE’s profitability in a significant way.

2025 should be strong

Even allowing for that, I expect the business to perform well this year.

Its current guidance for 2025, presuming the same exchange rate as last year (itself a risk), foresees sales growth of 7%-9% and underlying earnings per share growth of 8%-10%.

I think those numbers look absolutely solid, if they are achieved. However, they are far from transformative.

Bear in mind the recent strong growth in the BAE share price as well as the P/E ratio in the mid-twenties. For me, that sort of valuation is more consistent with a company in very strong growth mode rather than one that is looking at high single-digit percentage growth on key metrics like underlying earnings per share, even as its industry undergoes a demand boom.

Meanwhile, BAE points to its “record order backlog”.

On one hand, I see that as positive: orders are flowing in. On the other hand, though, too large a backlog can be a problem for defence contractors.

The longer orders take to fulfil, the less happy customers may be – and that can be problematic not only in terms of future order flow, but also sometimes results in financial penalties.

I expect BAE to have a strong 2025 and reckon that could continue in years to come. But I think the BAE share price already builds in that expectation. For the share to move up markedly higher from here I think would take stronger news on profits or orders.

I have no plans to invest.

It has been a dramatic week in the markets – and there could be a lot more where that came from. Uncertain stock markets can sometimes be a great place to go bargain hunting. That helps explain why I maintain a list of shares to buy if a rocky market pushes their price down to an attractive level.

But in doing so, I try to remember a few important principles.

A big fall in price does not necessarily equal a bargain

When the market tumbles and a share price falls rapidly, it can be tempting to think there must be some value on offer.

In reality, though, just because a share price falls a long way does not necessarily make it a bargain.

Instead of comparing the cost of a share now to what it used to be, I think it makes more sense to compare it to what I think it is worth based on future commercial prospects.

Some shares get knocked down and don’t come back

Back in the dotcom boom of 1999-2000, UK tech retailer and service provider Computacenter soared, then crashed.

It came back to its previous price – but it took two decades to do so!

Other shares get clobbered in a turbulent market and never make it back to their former price.

It can be tempting to think that a rocky market drags most shares down, so when the tide turns most will come back.

In reality that is not necessarily true.

It matters whether the cause of a crash directly affects a business or not – and also whether it has the financial means to ride out a storm.

As I look for shares to buy amid the current market turbulence, then, one question I am asking myself while weighing up the valuation of firms like Nvidia is whether their long-term business value has likely been reduced, or not.

Irrational markets still call for rational thinking

When the market behaves in odd ways, some investors do the same.

Maybe a share price has become so seemingly compelling, for example, that they forget the important risk management principle of diversification and put a disproportionate amount of their money into a single investment.

That can be a costly mistake when the market is calm – and also when it is not.

Take Reckitt (LSE:RKT) as an example.

During the last market crash, following the beginning of the pandemic, an investor might have decided that there was money to be made in hygiene products.

Reckitt has proprietary formulations, strong brands like Lysol, deep experience, and a worldwide distribution network.

Yet, over the past five years, the share price has fallen 16%.

That is bad enough but it is put into even worse perspective when compared to the FTSE 100 index, of which Reckitt is a constituent. The index has moved up 50% during the same period.

Some of the problems Reckitt has faced, like lawsuits related to its nutrition business, were not necessarily obvious five years ago.

But that is exactly the point! Even an excellent company can run into unforeseen problems.

So, no matter how tempting a particular share may seem when choppy markets move its price much lower, a savvy investor always stays suitably diversified.

With the dawn of another tax year, another ISA allowance begins. That seems like as good a moment as any to reflect on some ways in which people aim to build wealth in their Stocks and Shares ISA.

Here are three I use.

1. Sticking to what you understand

It can be tempting in the stock market to chase the next hot thing.

There is nothing wrong with that in itself. But my approach to investment is built on buying shares and holding them for the long run. I am not trying to buy a share just because I expect it will soon be worth more and I can offload it onto someone else. I see that as speculation.

Rather, I am trying to buy a small stake in a company I think offers a combination of strong long-term commercial prospects and an attractive share price.

That judgement can be hard enough to make at the best of times, so I try to improve my chances of success by sticking to business areas I feel I understand and can assess.

2. Be clear about why a share could make money

Sometimes a share has a big dividend – yet even that cannot make up for the decline in its share price over time.

On other occasions, a business performs brilliantly but its shares, already priced for very high expectations, actually move down not up.

Some shares have done brilliantly in the past, but something in their market has changed that means their future performance will be worse.

A Stocks and Shares ISA can grow in value thanks to capital gains, dividends or a combination of both. But it can also lose value due to falling share prices.

So I think it is helpful for an investor always to be clear about how they hope a particular share may help them build wealth.

For example, consider my holding in brewer and distiller Diageo (LSE: DGE). It has grown its dividend per share annually for well over three decades. Its premium brands like Guinness give Diageo pricing power that could help support ongoing dividend growth.

But the yield is 3.9%. That beats the FTSE 100 average of 3.4% but is still well below the yield I earn from some other blue-chip shares. So why do I hold Diageo shares?

I think the company is undervalued. The share price has crashed 29% in the past year. That reflects a raft of risks, from weak demand in Latin America to the potential impact of tariffs on the export-driven business.

And I believe the share now looks relatively cheap for this quality of company. I am hopeful that I can make money from owning Diageo shares over time, not just because of dividends, but also as the share price hopefully moves closer to what I see as a fair level.

3. Build your own wealth, not your stockbroker’s!

Earning money in a Stocks and Shares ISA sounds good — but that can leak through an investor’s fingers if they pay more than necessary in fees, costs, commissions, charges and the like.

Over time, even small-seeming costs can add up. So a savvy investor will compare options for different Stocks and Shares ISAs, whether for a new ISA this tax year or transferring an existing one.

This week’s announcement of 10% trade tariffs on UK goods to the US has sent shockwaves through British markets. With transatlantic trade under pressure, several UK shares could feel the impact — particularly those with significant exposure to the American market.

Although many UK businesses deal with the US, three in particular stand out due to their high sales in the region. These companies that appear to be most exposed are Ashtead Group (LSE: AHT), Compass Group (LSE: CPG), and Experian (LSE: EXPN).

Let’s see how the new tariffs could affect the performance of these stocks going forward.

Ashtead Group

Ashtead Group is a British equipment rental company that has achieved tremendous success in America. It now generates 92% of its sales through its US-based Sunbelt Rentals division. If tariffs are extended to machinery or parts sourced from the UK, the company may encounter higher costs that could squeeze margins.

The stock is already down 11% since tariffs were announced, almost double the 5.7% drop of the FTSE 100. At £37.24, it’s now at its lowest level in almost three years.

The company has already planned to move its primary listing to the US and may now choose to fully relocate there. In the long run, such a move could be highly beneficial for the company but I think it’s wise to hold off until there’s more clarity.

Compass Group

As the world’s largest catering firm, Compass Group operates extensively across schools, hospitals, and corporate campuses worldwide. The extensive number of contracts it holds in the US accounts for 68% of its sales. While much of the firm’s US sourcing is domestic, any UK-supplied speciality goods or services could be impacted, raising concerns about cost management and potential contract renegotiations.

The shares suffered only a minor 2.5% drop when the tariffs were announced, reflecting confidence among investors. They remain up 134% over the past five years. Since tariffs largely target automotive, electronics, consumer goods, and agriculture, I don’t think Compass will be badly affected.

However, it already has a high price-to-earnings (P/E) ratio of 41.3, so growth could be slow. I’ll consider the stock only if earnings increase considerably in the next results.

Experian

Experian is one of the world’s largest consumer credit reporting firms, deriving 66% of its income from North America. Fortunately, most of its services are digital and data-based, meaning direct exposure to tariffs is limited. However, any deterioration in UK/US relations could have indirect effects on regulation, data-sharing agreements, and cross-border operations.

The shares are down 8.3% since the announcement, slightly above the FTSE 100. But like Compass, I don’t expect Experian to be hard hit by the tariffs. The biggest risk may be competition from US-based rivals like Equifax and TransUnion. At the same time, UK-based firms that use these rivals may choose to switch to Experian as a result of the tariffs.

Price targets still look good, with analysts expecting a 30% price increase in the coming 12 months. Overall, I like its prospects and think it’s still worth considering, despite the tariffs.

It’s been a brutal week for global investors, especially those with heavy exposure to US equities. The S&P 500 index is down 8.2% in a week and 13.2% in a month, while the Nasdaq Composite has lost 8.6% in one week and 16% over a month. Meanwhile, the UK’s FTSE 100 index has been a relatively safe haven, losing 7% in a week, but only 8% over the past month.

These recent falls in the American stock market were no surprise to me. On 20 February, one day after the S&P 500 hit a fresh record high, I wrote that “US stocks look overpriced” — repeating a belief I’ve expressed repeatedly in 2025.

Having witnessed the stock-market crashes of 1987, 2000-03, 2007-09, and spring 2020, I’m not afraid of market meltdowns. I see these corrections as opportunities to buy into great companies at lower prices. That said, I see far more value in the FTSE 100 than in its American counterpart.

Also, it’s worth noting that the FTSE 100 is actually up 1.8% over 12 months. Adding in cash dividends of 3.5% takes the Footsie‘s total one-year return to around 5.3%. In contrast, the S&P 500 is down 2.5% over 12 months, with its dividend yield of 1.4% reducing this loss to 1.1%. For the Nasdaq Composite, these numbers are -4.1%, +0.9%, and -3.2%.

In other words, the FTSE 100 has shown itself to be fairly resilient in the face of the latest US market storms. Even so, scores of Footsie stocks took a beating this week.

FTSE fallers

Here’s a selection of popular and widely held FTSE 100 shares that dived at least 10% this week:

Two of these FTSE fallers are major energy companies, hit by falling oil prices and fears of slowing global demand. Three are big banks, whose earnings could shrink if the UK economy contracts. And two are players in global aviation, which would suffer in any prolonged recession.

Value play or recovery stock?

Amid this latest bout of market anxiety, I think I’ve spotted one FTSE 100 potential recovery/value play. Shares in miner and commodity trader Glencore (LSE: GLEN) plunged by 19% this week, placing it at 99/100 among Footsie stocks.

Having hit a one-year high of 506.72p on 20 May 2024, Glencore stock hit a 52-week low of 230.55p on Friday, 4 April. The shares then closed at 236.9p, valuing this group at £29.1bn. This leaves the share price down a whopping 48.9% over one year. Yikes.

For the record, my wife and I bought Glencore stock in August 2023 for 435.1p a share, so we are nursing a paper loss of 45.6%. But this has been partly offset by the generous dividends we have received to date.

Speaking of dividends, Glencore’s cash yield has jumped to 3.8% after this price plunge. History shows me that mining revenues are highly cyclical and volatile, driven by commodity booms and busts. Also, miners sometimes cut their dividends. Still, this stock looks so under-priced to me now that I have no intention of selling our stock. In fact, we may buy more of this FTSE 100 stalwart!

Back in late 2024, Tesla (NASDAQ: TSLA) was one of the hottest stocks in the market. At one stage, it rose up to $488 – nearly 150% above where it was trading mid-year.

However since then, the stock’s experienced a major wipeout. Here’s a look at how much an investor would have today if they’d stuck £10,000 into the stock at its peak.

A car crash

Tesla stock peaked on 18 December. As mentioned above, it topped out at $488. Fast forward to today, and the stock’s sitting at $239. That’s a return of around -51%.

A UK investor would have seen an even worse return though. That’s because the GBP/USD exchange rate has moved from 1.26 to 1.29 since 18 December.

What this means is that anyone who put £10,000 into the stock at its peak would now have about £4,790 (I’m ignoring trading commissions and assuming an investor could initially buy a full £10,000 worth of stock via fractional shares). Ouch!

The takeaways

Now, some people might look at this and conclude that investing in the stock market is very risky. And that would be understandable. But I don’t think that’s the key takeaway here.

For me, one of the biggest takeaways is that it pays to look at a company’s valuation before investing in it. Back in December, Tesla was trading at a sky-high valuation that didn’t really make a lot of sense. At the time, its price-to-earnings (P/E) ratio was close to 200. That wasn’t really justified given the company’s growth (or lack of) and risks.

Another takeaway is that it’s crucial to diversify when investing in stocks. Because every company has specific risks. If someone had just 2% of their portfolio in Tesla, the near-50% fall may not have hurt them too much. However, if an investor had 30% or 40% of their portfolio in the stock (and I’ve seen this kind of thing quite a bit), the chances are the value of their portfolio has dropped significantly since mid-December.

Ultimately, risk management’s crucial in investing, especially in high growth stocks. Because things can go wrong.

We’ve seen that here. Not only has Tesla faced plummeting sales worldwide but sentiment towards the electric vehicle (EV) company and CEO Elon Musk has really deteriorated.

Worth a look now?

Is Tesla stock worth considering while it’s around 50% off its 52-week highs? That’s a hard question to answer.

On one hand, I do think the company continues to have plenty of long-term potential. If the company can crack Full Self-Driving (FSD) technology, the potential’s huge.

On the other hand, the valuation still looks too high today. Currently, the P/E ratio is still over 90, which to my mind is not so attractive.

Given the high valuation, I think there are better growth stocks to consider buying today. If you’re looking for ideas, you can find plenty right here at The Motley Fool.