US p/e ratios are at higher levels today than they were at the height of the technology boom, says M...
US p/e ratios are at higher levels today than they were at the height of the technology boom, says Mike Lenhoff, chief portfolio strategist at Gerrard.
According to Bloomberg data, as of 29 January, the P/E ratio of the S&P 500 index was at 55.25, compared with February 2000 when it was closer to 30 times.
Lenhoff says: 'The difficulty here is not only that US earnings have been depressed ' they have been equally depressed in Europe and Japan ' but that share prices in the US have strongly outperformed. US P/Es are at their highest levels for decades.'
The markets for technology, media and telecoms and the old economy stocks are both at their highest ratings since the early 1970s, leading to expectations of another market correction, adds Lenhoff, noting that the spark is likely to come from any increase in the rate of disappointing earnings results.
Hopes that the technology sector will benefit from the wave of earnings surprises sweeping through the US' fourth-quarter reporting season were quickly crushed as tech firms queued up to warn of weak revenues.
This is the result of little or no pricing power and poor sales forecasts, says Lenhoff, and has led to the curtailing of many firms' investment intentions. Disappointment over the technology sector has greatly influenced sentiment regarding the prospects for equities, he believes.
Andrew Whalley, head of investment at Legg Mason Investors, believes valuations are high on an historic basis but highlights the difficulty of calculating this. Instead of basing calculations on a company's net profits, which has traditionally been the case, some strategists are calculating price to earnings valuations on a company's operating profits.
This has the effect, according to Whalley, of distorting valuations to the point where they can look far more reasonable.
'Quite often, one of the strategists' goals is to help sell units in their companies' funds,' he says. 'If they say they can see growth opportunities in the world's leading equity market then that could obviously appear a seductive argument to investors. In a way they have a vested interest in the market going up.'
While he considers valuations too high based on recent earnings, Whalley believes that observers who are gloomy about the prospects for growth in the US equity market could be missing buying opportunities.
Whalley says: 'There is a massive concentration effect in the S&P 500 with 25 overvalued stocks accounting for about 43% of the index. This is absurd. There are masses of stocks in the US that are looking undervalued when assessed using sensible criteria, particularly in banks and utilities. This means looking for companies with attractive P/Es, good growth prospects, healthy balance sheets and reasonable dividends. You are unlikely to find these companies in the technology sector.'
Whalley foresees a tepid earnings bounceback later this year, although he is quick to point out that he feels the underlying trading position has not improved dramatically. Instead, the bounce will be the result of an absence of the one-off costs such as write-downs and redundancy payments which were seen last year, he says.
Stock-specific growth opportunities.
Many sectors look undervalued.
Possible earnings bounce-back this year.
Tech earnings have depressed sentiment.
Valuations at highest since 1970s.
Earnings could get worse.
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