Since April, stock market returns have been painful for the average investor – the S&P is down more than 10%. But as the earnings season kicks into gear, some analysts are bullish on the idea that investors have pushed equities lower than is justified. If that is the case, exchange-traded funds (ETFs) may be in for a nice little surge.
According to Peter McKay of The Wall Street Journal, “some analysts… are wondering if investors have gotten a little too bearish.” Currently, the S&P 500 is trading at less than 13 times expected earnings for the next 12 months. On average, that ratio has held at about 18.
The last time we saw such low valuations was back in early 2009, in the throes of our economic crisis. But after the sell-off, we witnessed one of the strongest rallies in market history.
The big question is whether the low prices today are justified. Looking at earnings data, however, that doesn’t seem the case.
The number of companies that think earnings will be lower than expected is only slightly higher than the number of companies that think the opposite. The current ratio stands at 1.2, which is a lot lower than the long-term average of 2.1. [The Trendless Market Survival Guide.]
Further, analysts expect per-share earnings for the S&P 500 to grow about 27% from a year ago. That is lower than the 55% leap from the first quarter, but still reflects optimism in our recovery.
However, there are those that remain bearish, such as Chip Hanlon of Delta Global Advisors, who said, “Markets are already looking ahead to tax hikes. The government stimulus effects are not helping. The real estate market is in the verge of a double-dip.” [Weaker GDP Numbers.]
If you are a bull in these tough market times, you can look to ETFs to diversify your sentiment across different sectors. Don Dion of the Street recommends investing in technology and energy ETFs. [How to Play the S&P 500 with ETFs.]
For technology, he recommends the PowerShares QQQ (QQQQ) and First Trust Dow Jones Internet Index (FDN). For energy, he recommends the Energy Select Sector SPDR (XLE) as a solid broad based energy play, and the SPDR S&P Oil & Gas Equipment & Services ETF (XES) for a more aggressive play. [Apple, King of QQQQ.]
Sumin Kim contributed to this article.