Stocks: Overvalued Or Cheap Heading Into 2021?

This week, Tracey is joined by Zacks Director of Research, Sheraz Mian, to discuss the earnings outlook for the S&P 500, the large cap companies, as well as the S&P 600, the small cap companies.

Currently, analysts expect 2021 S&P 500 earnings to rise 21.9% which is an expected P/E of 22.6.

That sounds expensive, right?

The S&P 600, small caps, are forecasted to see a rebound in earnings of 33.6% after a decline of 30.4% in 2020. It’s 2021 P/E is at multi-decade highs.

But is it all about the “E” or does record low interest rates also play a role in valuation?

Technology Out Performing in 2020

In the third quarter of 2020, technology sector earnings were up 12.6% but they would have been up 20.4% year-over-year if not for Apple (AAPL - Free Reportand Intel (INTC - Free Report), both of who saw earnings decline by 3.9% and 22%, respectively.

They are so big they were a drag on the sector’s overall earnings growth in the quarter. 

But heading into 2021, analysts see no change in tech’s dominance. Even in the S&P 600, small cap technology is expected to see double digit earnings growth every quarter next year.

Where Can You Find the Hidden Gems in 2021?

While analysts remain bullish about the rebound in both large and small caps, Sheraz believes the focus for investors who want to out perform the indexes should be on the small caps.

Sure, investors can buy a general small cap ETF to get exposure. The S&P Small Cap 600 ETF (SLY - Free Reportfits that bill.

But what about investors who want to own individual small companies? Where do you find the best companies?

Hidden Gems in Zacks Top 10 Portfolio

Every year for his Zacks Top 10 Portfolio, which launches in January, he tries to find hidden gems that aren’t in the spotlight, and that includes small cap companies.

Two big winners in the 2020 portfolio were not on the top of everyone’s lips to start the year but became pandemic darlings once the coronavirus hit.

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Disclaimer: Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the  more

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