The following is an excerpt from John Blank’s full Market Strategy piece. To access the entire PDF, click here.
How Can the U.S. Bull Market Run So Far, So Fast?
In this monthly U.S. market update, we have a critical question to answer—
How can the S&P 500 have a 17.7 forward 12-month Price to Earnings (P/E) ratio, when the historic average is 14.3, and when the latest GDPNow forecast for the first quarter U.S. economy is a paltry +1.9% q/q?
First of all, it is a good question. There should be some connection.
We DO see, however, a much stronger earnings per share (EPS) number coming out for the accumulated S&P 500 index companies in the latest fourth quarter reports. That was +4.9%. The fourth quarter of 2016 will mark the first time the index has seen year-over-year growth in earnings for two consecutive quarters since Q4 2014 and Q1 2015. That was 7 quarters ago.
The end of the earnings recession is one big reason behind the recent S&P 500 rise. I expect this is the biggest reason.
The second reason is likely the animal spirits and native optimism that sprung up from the Republican constituency on Wall Street. Much of the recent run up in stocks is blind optimism. In that sense, we need to be very careful.
Finally, there are deeper lending growth rates (averaging 6 to 7 percent) in a spectrum of financial markets to support bulls.
We have seen this throughout this cycle. As long as these multiple pipes of liquidity flow swiftly inside the U.S. economy -- at growth rates centered at 6 to 7 percent -- risk is “on.” Liquidity is just not sourced from U.S. “QE” anymore.
Zacks Sector/Industry/Company Telescope
The March sleeper story appearing, once again, via the Zacks sector and industry ranks is the internationally exposed areas. Info Tech and Materials are more globally exposed to non-U.S. final demand. They get the strongest bid. It’s NOT a Trump trade, folks!
The new U.S. story emerging is a cyclical pickup seen from Consumer Discretionary. I haven’t seen that in awhile. It must be the strong stock market and Republican optimism.
Health Care is still a laggard. But this sector has to turn up sometime soon.
(1) Info Tech gets back to Attractive. The leader (again) is Semiconductors. The Misc. Tech space looks HOT too.
Top Zacks #1 Rank (STRONG BUY): Coherent (COHR - Free Report)
Coherent Inc. designs, manufactures and supplies electro-optical systems and medical instruments utilizing laser, precision optic and microelectronic technologies. It is a $4.5 billion market cap stock.
(2) Materials remain Attractive. The leaders (again) are Steel and their supplier, Metals Non-Ferrous.
Top Zacks #1 Rank (STRONG BUY): Ternium SA (TX - Free Report)
Ternium is the leading producer of flat and long steel products of Latin America and consolidates the operations of three steel companies Hylsa in Mexico, Siderar in Argentina and Sidor in Venezuela. There is a Zacks VGM score of A.
(3) Consumer Discretionary has risen to Attractive. The Big Leader is Home Furnishing-Appliance, Autos/Tires/Trucks, and Other Consumer Discr.
Top Zacks #1 Rank (STRONG BUY): Howden Joinery PLC (HWDJY - Free Report)
Howden Joinery Group PLC is involved in the manufacture, sale and distribution of kitchens and joinery products. It offers kitchen cabinets and frontals, doors and worktops and breakfast bars; appliances. This is a $3.25 billion market cap stock.
The company operates primarily in the United Kingdom, France, Belgium, the Netherlands and Germany. Howden Joinery Group PLC is headquartered in London, the United Kingdom.
(4) Energy is now a Market Weight. However, the top industries are now Oil E&P and Oil & Gas Drillers.
(5) Financials are a Market Weight. The Banks & Thrifts, Banks-Major and Investment Banking & Brokering are looking solid with rate hikes on the way.
(6) Industrials fall back to a Market Weight. The big leader is Machinery. Construction-Building Services is worth a look, as are Business Services and Industrial Products-Services.
(7) Utilities are a Market Weight. The leader is Utilities-Water Supply.
(8) Health Care continues to languish. It remains Unattractive. The big loser is Drugs.
(9) Consumer Staples rises, but rise only to Unattractive. The leader is Agri-business now, and Tobacco is next. Soaps & Cosmetics are OK. The loser is Food/Drug Retail.
(10) Telco Services looks Unattractive. The loser is Telco Services.
This was an excerpt from John Blank’s full Market Strategy piece. To access the entire PDF, click here.