UK Stocks and the Starmer Scuttlebutt

Editors’ Note: MarketMinder is nonpartisan, favoring no party nor any politician. We assess political developments for their potential economic and market implications only.

Ordinarily, a White House file dump containing Apollo astronauts’ UFO pictures would be the dominant transatlantic talking point this fine Friday. But even this was upstaged by the UK’s local election results, which renewed the scuttlebutt over Prime Minister Keir Starmer’s future. And with it, warnings that a leadership change threatens UK markets. Yet stocks have been dealing with this uncertainty all year, and we think they are shouting that this is a false fear.

While the results are still dribbling in, Thursday’s local votes were a drubbing for Starmer’s Labour Party. Labour lost Wales’s devolved parliament (the Senedd) for the first time in its nearly 30-year history, a symbolic defeat in the party’s spiritual base. Councils across England and Wales swung to the populist-right Reform and populist-left Green Party, while the Conservatives took a symbolic victory over Labour in Westminster. Not all of this was a referendum on Starmer. The Senedd campaign centered on Welsh voters’ local governance frustrations, for instance. But Friday morning, trade unions (critical Labour backers) and many backbench Members of Parliament (MPs) were calling for Starmer to go.

We won’t bother guessing whether Starmer is actually finished. Such things defy prediction and usually depend on backroom deals—not a market function. Headlines have deemed him doomed since former US Ambassador Peter Mandelson’s extensive appearance in the Epstein files created questions about the vetting process and who knew what, damaging Starmer’s reputation, standing and political capital. Many circled the local elections as the final nail in his (political) coffin. But past mooted leadership challenges have come to nothing. For his part, Starmer says he won’t step down and leave “chaos” in his wake. Several cabinet ministers rallied around him, dismissing leadership talk. Maybe it will help that Labour fared poorly in his potential challengers’ constituencies yesterday. Maybe he will agree to steer the ship for now while standing down before the next election, due by August 2029. Or maybe he will be gone by the time you reach this period.

Uncertainty is clearly high—traditionally a market headwind. But crucially, it is a headwind UK stocks have dealt with for several months, and you could argue it isn’t rising. We may actually be gradually sliding toward clarity as we learn whether Starmer stays or goes. If he were to depart, a leadership challenge might add some jitters, but it is hard to see much surprise power. The mooted challengers have been known for months, and we have seen dozens of op-eds warning each would be some leftist disaster for the country. All of this chatter helps markets pre-price the fear and the outcomes, sapping negative surprise power. And most importantly, baking in the fear so that the benign reality of intraparty gridlock spurs relief.

Note, too, that all this uncertainty hasn’t been bearish for UK stocks, which are outperforming their European peers this year. The margin actually widened as Starmer’s woes mounted this year before narrowing in the run-up to the election. If his potential exit were truly bearish, we think it would be more apparent in relative returns.

Exhibit 1: UK Stocks Argue Against Political Fears

Source: FactSet, as of 5/8/2026. MSCI Europe Ex. UK and MSCI UK Investible Market Index returns with net dividends, 12/31/2025 – 5/8/2026.

As for the specific fears about a leadership change—that a more left-leaning Labour government will dial up spending and taxes, sapping growth and upsetting bond markets—we can cover that in more detail if, as and when the time comes. For now, it is all just speculation based on personalities. Investors should take all of that with a grain of salt, remembering markets don’t move on personalities and rhetoric. Policy matters, and specifically, whether policies are more radical than feared. With fear dominating the conversation, we see plenty of room for divisions within Labour to water down proposed legislation. This has happened several times under Starmer, forcing him to U-turn on inheritance tax and private pension changes to name just two. Headlines call U-turns a political embarrassment, but markets call them reality beating expectations. That relief is a stealthy tailwind.

So wait and see. As you do, keep some timeless things in mind. Politics is just one market driver. Economic fundamentals matter, too, and the UK’s still look better than sentiment appreciates. A country’s sector and style makeup also matter, and the UK should benefit from broader global tailwinds favoring non-US stocks and its big Financials weighting. People forget these things in the political fog, which boosts their bullish power. Look there, and tune down the political noise.