S&P 500 Earnings Update

This chart is the international stock index fund (VXUS) also breaking out to new 52 week highs. This is all taking place as the Nasdaq 100 is about 5% below its all-time highs. We were told the markets could never maintain the advancement without the leadership of big tech. The rotation into value, small caps, and international stocks is taking place and the market is still making new highs. Go figure.

Diversification has been a consistent theme on this blog. I believe in it wholeheartedly. I don’t like crowded trades and I don’t allocate money based upon what has been performing the best. One of the things I look at is valuation on a sector basis. The above chart shows each of the S&P 500 sectors current forward PE against its 5 & 10-year averages. One of the reasons I mentioned my allocation to health care was its valuation against the averages. While the S&P 500 trades 25% and 38.5% above its 5 and 10-year average PE, Health Care currently trades only 5% and 10.7% above its 5 and 10 year PE. Which is the “cheapest” sector relative to each’s 5 & 10-year averages.

The other very important aspect that I incorporate is the growth rate. A sector may be cheap because its growth rate is low or negative. Based upon 2021 earnings growth and current forward PE estimates, the most attractive sectors are Industrials, Consumer Discretionary, Basic Materials, Financials, Health Care. I’m using the PEG ratio in my analysis.

I still remain overweight on tech but have been taking profits in the sector for the last few months and using the proceeds to move into these other areas of the market in preparation for the potential of a rotation. We’ve seen numerous times were value starts outperforming growth only to revert back to the prior norms. Based upon the financial results of these big tech companies, its hard to see them being taken over by new leadership. But we are in uncharted waters, and the reopening trade presents a plethora of opportunities.

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