U.S. equities and stock exchange traded funds have been trading at their cheapest valuations since the start of the COVID-19 pandemic.
The January sell-offs, notably in technology and other growth stocks, have brought down valuations closer to historical averages. For instance, the S&P 500 benchmark traded as low as 19.3 times projected 12 month earnings, dipping below the 20 level for the first time since April 2020, but it was still higher than the five-year average of 18.9, the Wall Street Journal reports. The SPDR S&P 500 ETF Trust (SPY) is now showing a 20.4 price-to-earnings ratio.
With the Federal Reserve eying multiple interest rate hikes to tame the elevated inflationary pressures, investors have remained cautious on risk assets.
“Now that we’re talking about higher interest rates, future earnings aren’t as concrete or as clear,” Megan Horneman, chief investment officer at Verdence Capital Advisors, told the WSJ. “So people aren’t paying that elevated multiple.”
On the other hand, investors have been shifting to cheaper segments of the market. For example, the best-performing S&P 500 sectors of 2022 were those that ended 2021 with the lowest price-to-earnings ratios. Specifically, the energy sector traded at 11 times projected earnings at the end of 2021 and is up 23% year-to-date while the financial sector traded at 14.7 times earnings and rose a more modest 4%.
As investors look back into bank stocks, some may turn to broad financial sector-related ETFs to capture the rebound, including the Financial Select Sector SPDR (NYSEArca: XLF), the Fidelity MSCI Financials Index ETF (NYSEArca: FNCL), the iShares U.S. Financials ETF (NYSEArca: IYF), and the Vanguard Financials ETF (NYSEArca: VFH). The broad financial sector ETFs include hefty tilts toward big banks, but these broad sector plays also include other non-pure bank plays in the financial sector covering capital markets, insurance companies, diversified financial services, and consumer finance, among others.
Additionally, for broad integrated energy sector exposure, investors can turn to the Energy Select Sector SPDR (NYSEArca: XLE), the Vanguard Energy ETF (NYSEArca: VDE), the iShares U.S. Energy ETF (NYSEArca: IYE), and the Fidelity MSCI Energy Index ETF (NYSEArca: FENY).
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