US stocks are expensive. Bargain hunters should look elsewhere

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This commentary was posted recently by fund managers, research firms and market newsletter writers and was edited by Barrons.

Strategic ReportBCA ResearchJan. 7: US stocks look expensive. While valuations are a poor short-term timing tool, they are a great predictor of long-term stock prices. The Shiller PE [price/earnings] ratio reliably predicted stock performance over 10 years. Today, the Shiller PE is consistent with near zero real total returns over the next decade.

This commentary was posted recently by fund managers, research firms and market newsletter writers and was edited by Barrons.

Investor allocation to stocks also predicted the direction of stock prices. According to the Federal Reserve, US households held a record 41% of their financial assets in equities in the third quarter of 2021. If history is to be trusted, that would also equate to long-term stock returns close to zero.

Valuations outside the United States are more reasonable. While US stocks are trading at a Shiller PE ratio of 37, non-US stocks are trading at 20 times their 10-year average earnings. Other valuation metrics such as price-to-book, price-to-sell, and dividend yield tell a similar story.

—Peter Berezin and his team

Sunny outlook for the E&P sector

Industry Update Wells FargoJan. 7: We believe that the US E&P [energy exploration and production] sector may again outperform the market at large in 2022. While 2021 was the year of the three Rs (recovery, rotation and reflation), we believe that 2022 will be the year of the discipline of the three Cscapital, cash margins and countercyclical cash yields. We are also seeing less regulatory risk for the industry compared to a year ago, while progress in ESG is more widely recognized. [environmental, social, and governance] efforts. The hedging burden is also easing, offsetting inflationary pressures on cash flows. In this context, valuations discounted to the market should not be sustainable, opening the door for investors to be long in the sector again in 2022.

Our top picks in the industry are Devon Energy, Coterra Energy and PDC Energy. We like EOG Resources, Diamondback Energy, and Marathon Oil for petroleum; EQT and Antero Resources for gas; and Ovintiv, Matador Resources and SM Energy for exposure to small and mid caps.

—Nitin Kumar and his team

Prepare for the future of EV

THINK about economic and financial analysis Jan. 6: In 2021, the electrification trend accelerated in the main geographic areas and the main players in the automotive sector. We believe this trend will continue to strengthen in 2022. In 2021, the EU laid out its goal to switch to fully electric vehicles by 2035, the Biden administration set its goal of 50% electric vehicles by 2030 and a series of other countries have pledged to make a shift before 2040.

On the business side, in 2021 virtually all major players reaffirmed or announced strategic plans for a shift to electric vehicles over the next decade. For example, recently the world’s largest automaker, Toyota Motor, also announced a major investment program aimed at reaching 3.5 million sales of battery-electric vehicles by the end of the decade. It was a little less ambitious than the targets set by Volkswagen, but still a significant change in direction. The major existing automakers are dramatically increasing the electrification stakes to regain the initiative or fend off competition from outright electric car makers like Tesla, impending new entrants like Rivian and Lucid, and Chinese brands like BYD, Nio and XPeng.

—Shoulder Olexi, Rico Luman

Rate hikes won’t kill the stock rally

Market OutlookTruist Advisory ServicesJan. 6: A change in Federal Reserve policy often injects volatility into the markets. Indeed, this is one of the key points we discussed in our 2022 outlook and it is one of the reasons we are looking for more moderate market returns and more normal pullbacks.

That said, stocks have generally performed positively during times when the Fed is raising short-term rates, as this is normally associated with a healthy economy. A growing economy supports the growth of corporate profits, which in turn supports the stock market.

Notably, stocks have risen at an average annualized rate of 9% in the Fed’s 12 rate hike cycles since the 1950s, and posted positive returns in 11 of those instances.

Likewise, stocks generally rose during periods of rising 10-year US Treasury yields. In a study of 15 periods where middle rates have risen by at least 1.5 percentage points since 1950, stocks averaged an annualized gain of 12%.

Even with the recent rise in yields and 10-year stocks, the risk premium of stocks, a measure that compares the valuation of stocks to bonds, remains at a level that historically matches stocks outperforming bonds on a basis of 12. months averaging nearly 11%.

—Keith Lerner

New themes in technology investment

UBS House View Daily USUBS Jan. 4: The largest stocks in the S&P 500 index (Apple, Microsoft, Alphabet, Amazon and Tesla) now represent 23% of the index, a very heavy weight compared to history. But while this heavy weighting means these stocks will have a big impact on the overall index returns, we no longer see them as the best place to look for outsized returns in the tech sector. We expect more value to come from artificial intelligence, big data and cybersecurity, the ABCs of technology ….

Our Technology ABC theme is driven by powerful secular trends around automation, analytics, and key strategic security focus areas for many businesses. We expect this theme to generate 10% revenue growth over 2020-25 on average, higher than our estimate for the wider tech sector during this period (mid to high single-digit growth per year) and growth. earnings per share of 16% per year, on average.

—Mark Haefele

Where to hide in 2022

PCMPeak Capital Management Report Jan. 3: Where might investors seek refuge from the devastating impact of inflation and slower growth? There are opportunities, but savvy investors are likely already realizing that market returns in 2020 and 2021 will turn out to have been borrowed from years to come.

When the Fed kept the liquidity taps open, investors preferred corporate debt over treasury bills, stocks over bonds, and speculative growth over value. These trends of recent years should be reversed from 2022.

For fixed income, I think 2022 will reward investors who focus on credit quality instead of seeking yield. Speculative debt has performed very well over the past two years, but poor fundamentals can lead to strong sales of high yield securities. A barbell approach with both short and long-term Treasuries makes the most sense, given political and economic uncertainty.

For equities, companies with high profit margins and sustainable pricing power should be the center of attention. Topping the list is Healthcare, which is currently trading at a historically high discount to the S&P 500. Banks are also attractive and should be the first winners of any Fed tightening, while Energy is expected to be the first to win. dominate all sectors in 2022 as oil prices exceed $ 80 and valuations are very low today.

– Brian Lockhart

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