Erin Gibbs, Equity Chief Investment Officer, S&P Investment Advisory Services

S&P Global

Focus: U.S. Equities

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MARKET OUTLOOK:

S&P 500 Earnings and Valuations

It seems a combination of expectations of continued low rates across the globes and higher oil prices have pushed U.S. equity markets near all-time highs. They have also surpassed previous high valuation ranges. The S&P 500 hitting a new 3 year high of 17.6X forward earnings. The S&P 500 is clearly trading rich.

To move much beyond the previous high for the S&P 500 I would expect EPS growth forecasts need to improve, or inflationary expectations must decline. The lower growth and higher unemployment now forecast by the Philly Fed, compared with prior estimates, don’t give much hope for a ramp-up in EPS growth estimates.

Most attractive Sector right now:

Healthcare is one of the larger sectors in the S&P 500 and could push it further above. Earnings Growth in Healthcare are optimistic double digits for CY2017 but respectable 6.5 per cent growth over the next 12 months. Healthcare trading at below the market average P/E and looks particularly attractive trading below its 3 year average at just 16X forward earnings. Healthcare looks to have potential not only from earnings growth but multiple expansion.

Top Investing Ideas

Bed Bath & Beyond (BBBY.O)

Bed Bath & Beyond is one my favorite picks in the S&P homebuilders as BBBY could take advantage of both the increase in existing and new homes sales. Home-goods is a big online area as no one needs to try on a frying pan. And BBBY was late to internet game. But they have invested heavily and recently have been beating earnings estimates, growing earnings and now even pay a dividend.  It has exceptionally strong Free Cash Flow yields and trades at just 9X forward earnings. The lows the stock put in earlier in the month may just be the turning point for this stock along with the housing market.   

Williams-Sonoma (WSM.N)

Williams Sonoma (which own West Elm and Pottery Barn as well). Another housing related retail stock. New home sales and existing homes sale could turn around a few beaten up retailers. WSM could take advantage of both the increase in existing and new homes sales. WSM just topped its Q1 EPS estimates and reaffirmed guidance. And while many retailers are still scrambling to compete online, WSM was an early adopter of online sales, with half of its total sales being online now. WSM looks to be an attractive entry point here trading at just 14.3X forward earnings, a low not seen since 2012.

IBM (IBM.N)

International Business Machines is one of our largest overweights in our U.S. large cap fund. It has faced declining revenues for the last 3 years and 2016 is still expected to show a 3 per cent decline from the prior year but we see IBM’s strategic initiatives finally paying off in 2017 where revenues and earnings are expected to grow once again. We see cloud, analytics, mobile, social and security as growth opportunities, and IBM has been executing relatively well in these areas which accounted for over 1/3 of revenues last year. This is more of defensive position. A solid stable company that has shown progress to adapt in in a highly competitive market. IBM has also offered considerable stock buyback actions and indicated dividend yield of 3.4 per cent after they already increased it by 18 per cent last spring. 

Twitter: @GibbsErin / @SPGMarketIntel

Website: www.spglobal.com