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After a slow start to 2024, the S&P 500 is hitting new record highs, outplaying woes, including the delayed prospect of rate cuts, geopolitical tension and overbought market conditions. The benchmark crossed the major milestone of 5,000 for the first time ever in the latest trading session and is likely to move higher given the favorable market trends. The S&P 500 took almost three years to add 1,000 points after hitting 4,000 level on Apr 1, 2021.
A solid earnings season, easing inflation data and a resilient economy are powering the rally, resulting in a gain of 4.8% so far this year. SPDR S&P 500 ETF Trust (SPY - Free Report) , the proxy version of the S&P 500 Index, has also risen 4.8% (read: S&P 500 Nears 5,000: Bet on High-Beta ETFs).
With the S&P 500 hitting new milestones, valuations are also getting lofty, making investors wary about their investments. For those, we have highlighted five stocks in SPY that are undervalued, as reflected in their lower P/E ratio than industry peers. The constituent stocks have a strong Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of B or better, suggesting their outperformance in the months to come.
Companies listed on the S&P 500 have reported stronger-than-expected earnings, indicating robust financial health and operational efficiency. Total Q4 earnings of the 285 S&P 500 members that have reported results are up 4.4% from the same period last year on 3.5% higher revenues, with 81.1% beating EPS estimates and 64.6% beating revenue estimates. The 4.4% earnings growth represents the best growth rate since the second quarter of 2022 (read: Should You Be Overwhelmed by Solid Q4 Earnings? ETFs to Play).
The resilience of the U.S. economy has played a crucial role in the S&P 500's ascent, though it has reduced the likelihood of a near-term rate cut. Factors such as robust retail sales, consumer sentiment and a cooling trend in the producer price index indicate the possibility of the Fed achieving a soft landing, bringing inflation back to target without triggering a recession. This economic resilience, coupled with surging shares of big technology companies and optimism over artificial intelligence, has been a significant driver of the market's upward trajectory.
Valuation Concerns
According to LSEG Datastream, the forward price-to-earnings ratio for the S&P 500 rose to 20.4 times, a level last reached in February 2022, far above the index’s historical average of 15.7. Per Citigroup, the S&P 500 is currently trading at a trailing price-to-earnings (PE) ratio of about 22. That lands in the 92nd percentile for the S&P's typical valuation over the last 20 years.
Let’s take a closer look at the fundamentals of SPY.
SPY in Focus
SPDR S&P 500 ETF Trust holds 503 stocks in its basket, with each accounting for no more than 7.3% of the assets. This suggests a nice balance across each security and prevents heavy concentration. The fund is widely spread across sectors with information technology, financials, healthcare and consumer discretionary accounting for a double-digit allocation each. SPDR S&P 500 ETF Trust has an AUM of $483.6 billion and charges 9 bps in fees per year. It trades in 66 million shares per day on average and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see: all the Large Cap Blend ETFs here).
Below we have highlighted the abovementioned five cheap stocks in the ETF.
American Airlines, through its subsidiaries, operates as an air network carrier. The company provides scheduled air transportation services for passengers and cargo through its hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix, and Washington, D.C., as well as through partner gateways in London, Doha, Madrid, Seattle/Tacoma, Sydney and Tokyo. American Airlines saw a solid earnings estimate revision of 43 cents over the past 30 days for this year.
American Airlines has a P/E ratio of 6.10 compared with the industry average of 8.11. It sports a Zacks Rank #2 and has a VGM Score of B.
Prudential Financial offers an array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management and real estate services. It saw a positive earnings estimate revision of 20 cents for this year over the past 30 days and has an estimated earnings growth rate of 15.92%.
Prudential Financial has a P/E ratio of 8.10 compared with the industry average of 8.74. It has a Zacks Rank #2 and a VGM Score of A.
Royal Caribbean is a cruise company that owns and operates three global brands — Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises. The stock saw a solid earnings estimate revision of 41 cents over the past 30 days for this year, with an estimated growth rate of 40.5%.
Molson Coors, previously known as Molson Coors Brewing Company, was formed by the merger of Molson Inc. and Adolph Coors Co. in February 2005. The global manufacturer and seller of beer and other beverage products has an impressive diverse portfolio of owned and partner brands. Molson Coors saw a positive earnings estimate revision of 8 cents over the past 30 days for this year and has an estimated earnings growth rate of 2.43%.
Molson Coors has a P/E ratio of 10.88 compared with the industry average of 16.63. It has a Zacks Rank #2 and a VGM Score of A.
Centene is a well-diversified healthcare company that primarily provides a set of services to government-sponsored healthcare programs. The stock saw a positive earnings estimate revision of a couple of cents over the past 30 days for this year, with an estimated growth rate of 1.05%.
Centene has a P/E ratio of 11.10 compared with the industry average of 15.23. It has a Zacks Rank #2 and a VGM Score of A.
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5 Stocks in the S&P 500 ETF to Buy at a Bargain
After a slow start to 2024, the S&P 500 is hitting new record highs, outplaying woes, including the delayed prospect of rate cuts, geopolitical tension and overbought market conditions. The benchmark crossed the major milestone of 5,000 for the first time ever in the latest trading session and is likely to move higher given the favorable market trends. The S&P 500 took almost three years to add 1,000 points after hitting 4,000 level on Apr 1, 2021.
A solid earnings season, easing inflation data and a resilient economy are powering the rally, resulting in a gain of 4.8% so far this year. SPDR S&P 500 ETF Trust (SPY - Free Report) , the proxy version of the S&P 500 Index, has also risen 4.8% (read: S&P 500 Nears 5,000: Bet on High-Beta ETFs).
With the S&P 500 hitting new milestones, valuations are also getting lofty, making investors wary about their investments. For those, we have highlighted five stocks in SPY that are undervalued, as reflected in their lower P/E ratio than industry peers. The constituent stocks have a strong Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of B or better, suggesting their outperformance in the months to come.
These include American Airlines Group Inc. (AAL - Free Report) , Prudential Financial Inc. (PRU - Free Report) , Royal Caribbean Cruises (RCL - Free Report) , Molson Coors Beverage Company (TAP - Free Report) and Centene Corporation (CNC - Free Report) .
Favorable Market Trends
Companies listed on the S&P 500 have reported stronger-than-expected earnings, indicating robust financial health and operational efficiency. Total Q4 earnings of the 285 S&P 500 members that have reported results are up 4.4% from the same period last year on 3.5% higher revenues, with 81.1% beating EPS estimates and 64.6% beating revenue estimates. The 4.4% earnings growth represents the best growth rate since the second quarter of 2022 (read: Should You Be Overwhelmed by Solid Q4 Earnings? ETFs to Play).
The resilience of the U.S. economy has played a crucial role in the S&P 500's ascent, though it has reduced the likelihood of a near-term rate cut. Factors such as robust retail sales, consumer sentiment and a cooling trend in the producer price index indicate the possibility of the Fed achieving a soft landing, bringing inflation back to target without triggering a recession. This economic resilience, coupled with surging shares of big technology companies and optimism over artificial intelligence, has been a significant driver of the market's upward trajectory.
Valuation Concerns
According to LSEG Datastream, the forward price-to-earnings ratio for the S&P 500 rose to 20.4 times, a level last reached in February 2022, far above the index’s historical average of 15.7. Per Citigroup, the S&P 500 is currently trading at a trailing price-to-earnings (PE) ratio of about 22. That lands in the 92nd percentile for the S&P's typical valuation over the last 20 years.
Let’s take a closer look at the fundamentals of SPY.
SPY in Focus
SPDR S&P 500 ETF Trust holds 503 stocks in its basket, with each accounting for no more than 7.3% of the assets. This suggests a nice balance across each security and prevents heavy concentration. The fund is widely spread across sectors with information technology, financials, healthcare and consumer discretionary accounting for a double-digit allocation each. SPDR S&P 500 ETF Trust has an AUM of $483.6 billion and charges 9 bps in fees per year. It trades in 66 million shares per day on average and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see: all the Large Cap Blend ETFs here).
Below we have highlighted the abovementioned five cheap stocks in the ETF.
American Airlines, through its subsidiaries, operates as an air network carrier. The company provides scheduled air transportation services for passengers and cargo through its hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix, and Washington, D.C., as well as through partner gateways in London, Doha, Madrid, Seattle/Tacoma, Sydney and Tokyo. American Airlines saw a solid earnings estimate revision of 43 cents over the past 30 days for this year.
American Airlines has a P/E ratio of 6.10 compared with the industry average of 8.11. It sports a Zacks Rank #2 and has a VGM Score of B.
Prudential Financial offers an array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management and real estate services. It saw a positive earnings estimate revision of 20 cents for this year over the past 30 days and has an estimated earnings growth rate of 15.92%.
Prudential Financial has a P/E ratio of 8.10 compared with the industry average of 8.74. It has a Zacks Rank #2 and a VGM Score of A.
Royal Caribbean is a cruise company that owns and operates three global brands — Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises. The stock saw a solid earnings estimate revision of 41 cents over the past 30 days for this year, with an estimated growth rate of 40.5%.
Royal Caribbean has a P/E ratio of 12.55 compared with the industry average of 15.90. It has a Zacks Rank #1 and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Molson Coors, previously known as Molson Coors Brewing Company, was formed by the merger of Molson Inc. and Adolph Coors Co. in February 2005. The global manufacturer and seller of beer and other beverage products has an impressive diverse portfolio of owned and partner brands. Molson Coors saw a positive earnings estimate revision of 8 cents over the past 30 days for this year and has an estimated earnings growth rate of 2.43%.
Molson Coors has a P/E ratio of 10.88 compared with the industry average of 16.63. It has a Zacks Rank #2 and a VGM Score of A.
Centene is a well-diversified healthcare company that primarily provides a set of services to government-sponsored healthcare programs. The stock saw a positive earnings estimate revision of a couple of cents over the past 30 days for this year, with an estimated growth rate of 1.05%.
Centene has a P/E ratio of 11.10 compared with the industry average of 15.23. It has a Zacks Rank #2 and a VGM Score of A.