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Top Sector ETFs to Play Despite S&P 500's Still-Pricey Valuation
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Wall Street was off to the worst start to a year since 1939 and the global market selloff will continue, according to Bank of America Corp. and Morgan Stanley, as quoted on Bloomberg. After an awful first quarter, the month of May is also proving rough for the markets, mainly due to the Fed’s biggest interest rate hike in 22 years. Markets are pricing in another 190-basis-point rate hike in 2022.
Even though it declined 16% to start 2022, the S&P 500 is trading at 16.8 times its projected earnings over the next 12 months, which is still above the average multiple of 15.7 over the past 20 years, but down from a recent peak of 24.1 in September 2020, according to FactSet, as quoted on Wall Street Journal. The S&P 500’s decline through Friday marked its worst year-to-date performance since 1970, according to Dow Jones Market Data.
Morgan Stanley’s Strategist Michael Wilson, who has long been a disbeliever of the decade-long bull run in U.S. stocks, said in a note that even after five weeks of decline, he expects the S&P 500 to fall in the near term before climbing to 3,900 points next spring -- which is still about 2.5% below current levels – hurt by slowing earnings growth and elevated volatility, as quoted on Bloomberg. He recommended defensive positioning with an overweight in health care, utilities and real estate stocks.
Michael Mullaney, director of global markets research at Boston Partners, which manages $91 billion, thinks that the S&P 500 is fairly-valued but expects valuations to fall further, as quoted on Wall Street Journal. This is because the valuation of equities tends to decline when rates rise and earnings growth also tends to slow in these periods, even if the period is devoid of high inflation.
Plus, companies this earnings season have been mentioning “weak demand” at the highest rate since 2020, according to BofA Global Research, as quoted WSJ.
All Is Not Unwell
Wall Street Journal reported that analysts expect S&P 500 profits to rise 9.1% in the first quarter from a year earlier versus their forecasts of 5.9% growth on Dec 31, according to FactSet. For the year, profits are projected to grow 10%, marking an uptick of 7.4% they expected at the end of last year. Analysts estimate that the S&P 500 net profit margin will come in at 12.3% for the first quarter, above the five-year average of 11.2%. However, the winning trend may wane ahead amid a fast-tightening cycle.
Against this backdrop, below we highlight a few sector ETFs that could be played right now.
Energy – Energy Select Sector SPDR ETF (XLE - Free Report) – Zacks ETF Rank #2 (Buy)
The oil and gas rally this year has been a plus for the S&P 500 Index. The sector recorded 240.6% earnings expansion in Q1, with 174.1% growth expected in Q2 – the highest in the index.
The underlying Energy Select Sector Index includes companies from the following industries: oil, gas & consumable fuels and energy equipment & services.
The basic materials sector witnessed a 58.6% earnings expansion in Q1, followed by an 11.3% expected uptick in Q2. The construction sector’s growth also supports materials sector’s growth momentum. The construction sector recorded 29% growth in earnings in Q1, followed by 15.3% in Q2.
The underlying StrataQuant Materials Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology.
Real Estate –Vanguard Real Estate ETF (VNQ - Free Report) – Zacks Rank #1
The sector is known for higher yield. With the homebuilding sector struggling with high prices, higher costs of raw materials and lower availability of land, many will look for rental options.
The underlying MSCI US Investable Market Real Estate 25/50 Index is made up of stocks of large, mid-size, and small U.S. companies within the real estate sector. It yields 3.12% annually.
Healthcare – Health Care Select Sector SPDR ETF (XLV - Free Report) – Zacks Rank #1
The sector may gain strength on investors’ rush to safety in a volatile stock market. The sector is non-cyclical in nature, which in turn, is providing a cushion to the portfolio. Additionally, lockdown measures in China have led to global growth concerns, thereby raising the appeal for defensive bets.
The underlying StrataQuant Health Care Index employs the AlphaDEX stock selection methodology to select stocks from the Russell 1000 Index.
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Top Sector ETFs to Play Despite S&P 500's Still-Pricey Valuation
Wall Street was off to the worst start to a year since 1939 and the global market selloff will continue, according to Bank of America Corp. and Morgan Stanley, as quoted on Bloomberg. After an awful first quarter, the month of May is also proving rough for the markets, mainly due to the Fed’s biggest interest rate hike in 22 years. Markets are pricing in another 190-basis-point rate hike in 2022.
Even though it declined 16% to start 2022, the S&P 500 is trading at 16.8 times its projected earnings over the next 12 months, which is still above the average multiple of 15.7 over the past 20 years, but down from a recent peak of 24.1 in September 2020, according to FactSet, as quoted on Wall Street Journal. The S&P 500’s decline through Friday marked its worst year-to-date performance since 1970, according to Dow Jones Market Data.
Morgan Stanley’s Strategist Michael Wilson, who has long been a disbeliever of the decade-long bull run in U.S. stocks, said in a note that even after five weeks of decline, he expects the S&P 500 to fall in the near term before climbing to 3,900 points next spring -- which is still about 2.5% below current levels – hurt by slowing earnings growth and elevated volatility, as quoted on Bloomberg. He recommended defensive positioning with an overweight in health care, utilities and real estate stocks.
Michael Mullaney, director of global markets research at Boston Partners, which manages $91 billion, thinks that the S&P 500 is fairly-valued but expects valuations to fall further, as quoted on Wall Street Journal. This is because the valuation of equities tends to decline when rates rise and earnings growth also tends to slow in these periods, even if the period is devoid of high inflation.
Plus, companies this earnings season have been mentioning “weak demand” at the highest rate since 2020, according to BofA Global Research, as quoted WSJ.
All Is Not Unwell
Wall Street Journal reported that analysts expect S&P 500 profits to rise 9.1% in the first quarter from a year earlier versus their forecasts of 5.9% growth on Dec 31, according to FactSet. For the year, profits are projected to grow 10%, marking an uptick of 7.4% they expected at the end of last year. Analysts estimate that the S&P 500 net profit margin will come in at 12.3% for the first quarter, above the five-year average of 11.2%. However, the winning trend may wane ahead amid a fast-tightening cycle.
Against this backdrop, below we highlight a few sector ETFs that could be played right now.
Energy – Energy Select Sector SPDR ETF (XLE - Free Report) – Zacks ETF Rank #2 (Buy)
The oil and gas rally this year has been a plus for the S&P 500 Index. The sector recorded 240.6% earnings expansion in Q1, with 174.1% growth expected in Q2 – the highest in the index.
The underlying Energy Select Sector Index includes companies from the following industries: oil, gas & consumable fuels and energy equipment & services.
Basic Materials – First Trust Materials AlphaDEX ETF (FXZ - Free Report) – Zacks Rank #1 (Strong Buy)
The basic materials sector witnessed a 58.6% earnings expansion in Q1, followed by an 11.3% expected uptick in Q2. The construction sector’s growth also supports materials sector’s growth momentum. The construction sector recorded 29% growth in earnings in Q1, followed by 15.3% in Q2.
The underlying StrataQuant Materials Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology.
Real Estate – Vanguard Real Estate ETF (VNQ - Free Report) – Zacks Rank #1
The sector is known for higher yield. With the homebuilding sector struggling with high prices, higher costs of raw materials and lower availability of land, many will look for rental options.
The underlying MSCI US Investable Market Real Estate 25/50 Index is made up of stocks of large, mid-size, and small U.S. companies within the real estate sector. It yields 3.12% annually.
Healthcare – Health Care Select Sector SPDR ETF (XLV - Free Report) – Zacks Rank #1
The sector may gain strength on investors’ rush to safety in a volatile stock market. The sector is non-cyclical in nature, which in turn, is providing a cushion to the portfolio. Additionally, lockdown measures in China have led to global growth concerns, thereby raising the appeal for defensive bets.
The underlying StrataQuant Health Care Index employs the AlphaDEX stock selection methodology to select stocks from the Russell 1000 Index.