By historical standards, the S&P 500 looks relatively cheap trading at just 13.3x 2012 “earnings”. Considering an improving domestic economy, this looks awfully attractive next to a 10-year Treasury note yielding 2.3%.
But that doesn’t mean that all sectors of the S&P are cheap.
In fact, when you break down the P/E ratios by sector, some look much pricier than others. Take a look at this chart from Zacks Chief Equity Strategist Dirk Van Dijk’s weekly Earnings Trends article:
As you can see, some of the “cheapest” sectors right now are also the riskiest: Finance (banks), Oils & Energy (very volatile), Aerospace (facing federal budget cuts), Basic Materials (China exposure), and Industrials (China exposure). These sectors are all “cheaper” than the overall S&P.
And arguably the best sectors to be in right now (namely those benefitting most from an improving domestic economy) are all trading above 15x 2012 earnings: Consumer Discretionary, Retail/Wholesale, Business Services and Construction.
So while the overall S&P 500 might look relatively cheap, much of this is being driven by sectors with exposure to a slowing Chinese economy or the risky Finance and Oil sectors.
So is the market closer to being fairly valued than it might appear at first glance? Weigh in below:
To read this article on Zacks.com click here.
Zacks Investment Research
