Diageo shares rose in early trade on Monday before falling back after the drinks giant announced promising fiscal Q3 results that provided a welcome reprieve from warnings on slowing sales that dominated trading updates in recent periods.

Diageo’s organic net sales climbed 5.9% to $4.4 billion, driven by volume growth of 2.8% and positive price/mix of 3.1%, although reported net sales increased by just 2.9% due to unfavourable foreign exchange movements and recent disposals.

Management noted that favourable phasing contributed approximately 4% to the quarter’s organic net sales growth, primarily in North America. This timing advantage is expected to reverse in the fourth quarter.

All regions delivered positive price/mix except Asia Pacific, where continued consumer downtrading and adverse market mix negatively impacted performance.

Diageo has reiterated its full-year fiscal 2025 guidance for both organic net sales and operating profit. The company expects improvement in organic net sales growth in the second half compared to the first half of fiscal 2025, but it still sees operating profits falling as tariffs impact trading.

The company said the impact of tariffs is estimated at approximately $150 million on an annualised basis, assuming there are no increases from the current rates. Management expects to mitigate around half of this impact on operating profit, citing their “long track record of managing international tariffs”.

Investors will welcome Diageo’s assessment of the impact of tariffs, given that alcohol has been one of the main tariff battlegrounds in Donald Trump’s trade war.

Diageo’s launch of the first phase of its “Accelerate” programme to create a more agile operating model will also encourage investors. The group expects the programme to help deliver approximately $3 billion in free cash flow annually from fiscal 2026.

Diageo shares were 0.6% lower at the time of writing.

“Diageo managed to serve up solid growth in the first quarter, with sales benefiting from a good mix of both price and volume growth. Diageo has a world-class cocktail of brands, including Guinness, Smirnoff, Johnny Walker, and Tanqueray,” said Aarin Chiekrie, equity analyst, Hargreaves Lansdown.

“These powerhouse brands have helped all regions manage to squeeze through price hikes except Asia Pacific, which continued to see consumers downtrading to cheaper brands, which weighed on sales.”

The current tariff regime is expected to cost around $150mn annually. Diageo expects to be able to offset around half of this through streamlining operations and will likely lean on price hikes to help offset the rest. But this will take a bit of time to enact. Alongside a soft first-half performance, full-year organic operating profits are expected to decline slightly. Zooming out, the picture is starting to look a touch better than it has for some time. Sales to China are largely unaffected by tariffs, Latin America and the Caribbean are lapping some weak comparable figures, and there are early signs that the industry is recovering from its cyclical hangover.”

The FTSE 100 gained in early trade on Friday and looked set to close the week out on a high as European shares rallied amid rising investor sentiment.

London’s leading index was 0.4% higher at the time of writing as the German DAX added another 0.7%.

“European shares are largely holding onto yesterday’s gains, which saw Germany’s DAX reach a record high, with several other European indices closing at levels not seen since just before the Great Financial Crisis,” said Derren Nathan, head of equity research, Hargreaves Lansdown.

“It’s too early to call the end of US exceptionalism but there are signs that investors are looking to diversify.”

While there may be an element of rotation into European shares, it’s certainly not at the expense of US stocks that also pushed higher yesterday as a wave of optimism lifted all boats and took the S&P 500 further into positive territory on the year.

“The S&P 500 index extended its impressive winning streak to a seventh consecutive session, closing yesterday with a gain of nearly 0.41%, reflecting a significant improvement in investor sentiment,” said Linh Tran, Market Analyst at XS.com.

“The rally was primarily driven by renewed optimism over monetary policy easing and positive signals from U.S.–China trade relations, which have long been a major source of market uncertainty.”

FTSE 100 movers

AstraZeneca was the biggest contributor to the FTSE 100 gains in terms of the number of points, with a 1.7% gain as investors picked the stock up after recent selling driven by tariff concerns. GSK shares rose 1.6%.

St James’s Place was the FTSE 100 top riser after JPMorgan analysts bumped their price target up to 1,310p, maintaining its overweight rating.

Land Securities fell 1.6% despite releasing fairly respectable final results underscored by 5% rental growth.

“Land Securities was the biggest FTSE 100 faller despite reassuring investors that it hadn’t seen an impact of economic uncertainty on customer demand or investment markets,” explained Russ Mould, investment director at AJ Bell.

Housebuilders Taylor Wimpey, Persimmon, Barratt, and Redrow were all flat or marginally lower. The sector has gained substantially since the Trump-induced volatility and has begun to flatline in recent sessions.

Mining shares were also lower and acted to offset gains elsewhere in the FTSE 100. Glencore and Antofagasta were both down less than 1%.

Fresh research from analysts at asset manager Aberdeen reveals that the UK small companies valuation discount has narrowed amid an onslaught of takeover interest from overseas entities keen to capitalise on the low valuations of exciting UK companies.

Aberdeen’s research from February 2025 had identified UK small caps as the most undervalued stocks globally when comparing current 12-month forward price-to-earnings ratios against their 10-year averages. UK small caps were trading at a steep 23.4% discount to their historical average, compared to just a 3.2% discount for global smaller companies overall.

However, recent months have seen this valuation gap narrow considerably for UK small caps, with the discount shrinking to 14.6%.

Meanwhile, the MSCI ACWI Small Cap index—representing global smaller companies—has seen its discount widen to 30.3%. According to the latest data through April 30, 2025, smaller companies in Asia (excluding Japan) now face the largest regional discount at 42.9% below their historical average.

One of the driving forces behind the narrowing of the UK smaller company valuation discount is the £15 billion worth of bids for smaller companies recorded so far in 2025, mostly from overseas corporate entities.

Small and mid-caps have received the lion’s share of the bid interest. Of the 15 transactions announced in 2025 year-to-date, six were for FTSE 250 companies, four for FTSE Smallcap firms and four for AIM companies.

“The UK continues to be a happy hunting ground for both corporate and private equity bidders, due to low valuations and willing sellers,” said Amanda Yeaman, co-manager of the abrdn UK Smaller Companies Fund and the abrdn UK Smaller Companies Growth Trust plc.

“It is notable that corporates have been the main acquirors, which shows the attractiveness of UK companies and suggests confidence in the economic outlook and the interest rate environment. Currently there are willing buyers (attracted by the valuations available and the probability of a successful conclusion) and willing sellers. The scale of M&A and lack of IPOs is resulting in reduction in the number of UK-listed growth companies, illustrating the tension between the clear value in the market, but the shrinking asset pool.”