Yuichiro Chino/Momento via Getty Images
Higher estimates for the next twelve months in the fourth quarter earnings reports have seen upward revisions and are driving higher stock valuations, most visible among Big tech.
The S&P 500 Index (SPX) without technology (XLK) has not experienced multiple expansion so far this year, according to a note from Barclays' US Equity Strategy.
This is leaving some sectors with more attractive valuations compared to future earnings. That includes healthcare (XLV) and finance (XLF), where revisions are outpacing multiple expansion; and discretionary (XLY) and industrials (XLI), where valuations have narrowed even with improving trailing-twelve-month EPS, analyst Venu Krishna wrote.
On the other hand, energy (XLE) valuations have risen even with the worsening 12M EPS. This is a “potentially worrying setup as the sector remains the top cyclical allocation among long-term funds,” Krishna said.
“The latest leg of the stock rally is supported by better earnings from NTM (next 12 months) as well as multiple expansion, the latter mainly driven by tech (XLK),” he said. “(Fourth-quarter) estimates saw a big reset upon release, but now that results are mostly in the books, NTM estimates are on the rise.”
