Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
EQ: The S&P 500 bounced pretty hard off the 1972 low we experienced earlier this month, and it now looks like we’re back on pace to reach new highs. Are we now on pace for the Santa Claus rally?
Stovall: I think we certainly are. The market is now almost 100 points higher than where it was just a week or so ago, so you could even say that a rally has already occurred. But I think that this rally will continue up until the year end, pushing the S&P 500 to or maybe slightly above the 2100 level, and the Dow up to probably above its 18,000 level.
EQ: Tax-loss selling might be a reason for the mid-December slumps, which you said in our last interview is pretty common. Is this an opportunity for investors to pick up some bargains?
Stovall: Yes, it usually is, but there’s an old saying that bull markets take the escalator whereas bear markets take the elevator. So when selling occurs, sometimes it happens so quickly that prices drop very rapidly rather there being an even exchange, and therefore causing no ripples in the market.
So when the S&P 500 went down almost 5% into the middle of December, there was an awful lot of bargains that made themselves available, but have since gone away.
EQ: In this week’s Sector Watch, you examined whether Technology is still an attractive sector after its blistering run. Is it still a compelling group for investors?
Stovall: Yes, I think it is. Technology has gained more than 19% through Dec. 19, as compared to the S&P 500’s 12% gain. So the performance has been good, but this is just the first year out of three in which it beat the market. Plus, the Technicals still look fairly healthy, with the absolute and relative price trends being above their 13- and 26-week moving averages.
Earnings growth estimates for 2014 are pretty hefty at 11% for Technology, versus 7% for the S&P 500. Valuations look attractive with a P/E on 2015 earnings for Tech at 15.8 versus the 16.5 for the S&P 500. Even if you go back over the past 10 years and look at the relative P/E ratio for Technology, it’s trading at a discount to the overall market. That’s not even considering the go-go years of the 1990s.
So our feeling is that while this has been an above-average performer over the last 12 months, it still has some life to it as we head in 2015.
EQ: When you say investors may want to “tweak” their exposure in Tech, what specifically do you mean?
Stovall: First off, the article of the title, “Time to Tweak Tech?” is a reminder that I like alliterations. My conclusion was that while we don’t recommend that you make a change to the overall Tech sector, if you wanted to, you could try to make some changes within the overall sector.
I showed earnings growth expectations for each of the sub-industries in the category of Tech, and we find a group like Communications Equipment, which is expected to show a 16% increase in earnings in 2015, which is more than twice that of the S&P 500. Yet, the P/E ratio for the group is 13.4, which is 200 basis points below the market as a whole. A five-star stock like Qualcomm (QCOM) , which fits into this category, may be one that investors would want to consider.
So I showed those sub-industries that have attractive valuations with a list of stocks with best buy recommendations based on their sub-industries. So you can match up the recommended stocks with those sub-industries with those attractive valuations.
EQ: Just to give readers an idea, there are 57 names in the Tech group that are rated buy or strong buy, with 17 ranked strong buy. So there’s a lot of opportunities there.
Stovall: That’s right. Investors can see the list and the full report here. They can also kick the tires, if you will, by signing up for a 14-day free trial by going to www.getmarketscope.com. That way you can pull up my reports or do your own screening for stocks that look attractive.