Stocks on Wall Street have run-up substantially in the final year as bulls ran wild following the March 2020 sell-off. While some think this has produced stocks as well high-priced, analysts at Barclays consider otherwise. “Equity market valuations based on forward-looking earnings metrics do look elevated relative to history. However, the scale of positive news expected in coming quarters means that stocks still don’t look too expensive to us,” they mentioned in a current note. The multinational investment bank says it is nonetheless overweight on equities, seeing positives ahead with greater earnings.
Are valuations justified now?
Analysts at Barclays mentioned that earnings development has brought valuations to more comfy levels now. “The strong realized and expected earnings growth means that valuation metrics are actually less elevated now than in mid-2020, despite the S&P 500 rising so much since,” the note mentioned. Further Barclays added that the financial backdrop is powerful sufficient at this juncture with policy action probably to keep accommodative for extended sufficient that fundamentals have area to “grow into” valuations.
The stimulus in the United States and the lockdowns have resulted in “forced savings” which are probably to help consumption in the post-pandemic globe. This, according to Barclays, will also help the threat appetite going ahead. “As risk-appetite continues to return, there is a good argument that financial asset valuations should remain elevated relative to history,” they added.
Earnings probably to keep powerful
Earnings in the US stock markets are anticipated to stay powerful in 2021, which has helped Barclay’s stay overweight on equities, selecting them more than fixed revenue. “We still prefer equities over fixed income. Yes, equity multiples have expanded over the past year, but much of the rally has been due to the absolutely stunning recovery in earnings.”
While it took more than 4 years following the terrific economic crisis for earnings to return to their Q2 2007 levels, S&P 500’s earning in the final quarter of 2020 have been currently greater than the pre-pandemic levels. The consensus forecast for 2021 S&P 500 earnings is now at $173.
Sectors to watch
Barclay’s are overweight sectors such as hardware/semis (ex-FANMAG), industrials and healthcare. The investment bank is underweight on communications services (exFANMAG), utilities and true estate, saying that the valuation premiums are not justified in these pockets.