Thursday, August 11, 2011

S&P 500 Sectors & Valuations

While there are lots of good reasons to panic, in Monday’s Morning Briefing (for subscribers), we listed some reasons not to panic. Most importantly, profits remain impressively strong and valuations are very cheap. Forward earnings rose to new record highs for five of the S&P 500 sectors during the first week of August: Consumer Discretionary, Consumer Staples, Health Care, Materials, and Information Technology. They were at or near cyclical highs for Energy, Industrials, and Telecommunication Services.

Forward P/Es, on the other hand, have plunged dramatically in recent days. Here are the latest readings as of yesterday’s closing prices: Financials (8.7), Energy (8.7), Health Care (10.0), Materials (10.3), Information Technology (10.5), Industrials, (10.7), Consumer Discretionary (12.1), Utilities (12.3), Consumer Staples (12.9), Telecom Services (14.3).

Stocks are cheap, but only if earnings remain strong. The reason they are cheap is because many investors are now starting to believe that a recession is imminent and that will be very bad for profits. That’s not my forecast, but the bears have their own compelling list of reasons to panic.

Corporate managers may be in a panic to buy their very cheap shares. Bloomberg reports this morning: “More executives at Standard & Poor’s 500 Index companies are buying their stock than any time since the depths of the credit crisis after valuations plunged 25 percent below their five-decade average. Sixty-six insiders at 50 companies bought shares between Aug. 3 and Aug. 9, the most since the five days ended March 9, 2009, when the benchmark index for U.S. equities reached a 12-year low, according to data compiled by Bloomberg.”

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