By Palash R. Ghosh: Subscribe to Palash's RSS feed
July 28, 2010 9:52 PM EDT
While the U.S. stocks market remains well below its late April closing high, it has rebounded nicely in July as second-quarter earnings and third-quarter guidance have largely exceeded expectations, helping to offset continued weakness in domestic economic data, according to Alec Young, equity strategist at S&P.
“The upbeat news on profits comes at an opportune time for investors, as we think it has helped neutralize the adverse stock market impact of an ongoing negative drumbeat of employment,
housing, and consumer related economic releases,” he noted.
In May and June, when all investors had to trade on was mediocre macroeconomic data points, market performance was decidedly weaker, Young added.
“So, in effect, the earnings season has bought investors some time in which to see the economic recovery stabilize,” he said.
“Whether or not the economy will be forthcoming remains the $64,000 question.”
From a valuation standpoint, Young maintained, at 13.4-times 2010 estimated earnings, the market appears reasonably valued to him.
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While the S&P 500 may appear cheap on a forward valuation basis, trading at only 11.7-times 2011 estimated earnings of $94, Young believes that greater evidence of the recovery’s sustainability will be
required before assuming that profit forecasts for next year will be fully achievable.
“In light of the sluggish nature of the economic recovery, our current recommended sector positioning reflects a bar-belled stance where both our overweight and underweight selections are balanced between cyclical and defensive sectors,” Young explained.
S&P's overweight sector recommendations – Information Technology and Health Care -- reflect an emphasis on what they view as dependable growth at a reasonable price as both sectors trade at big valuation discounts to their long-term
averages.
Conversely, S&P recommends underweighting sectors with limited earnings leverage and/or visibility, such as Utilities and Materials.
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