US Stocks Start to Look More Attractive

Some fears surrounding the US stock market are overblown, leading to attractive valuations in financial services and consumer cyclical sectors

Elizabeth Collins, CFA 29 March, 2016 | 4:54PM
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Although the S&P 500 had fallen some 10% from the start of 2016, a strong bounce from mid-February puts us basically back to where we started the year. As of mid-March, the market-cap-weighted-average price/fair value ratio of our US equities coverage universe is 0.92, down from 0.96 as of December 15, 2015.

The financial services sector is by far the most undervalued based on our estimates of companies' intrinsic values, with a market-cap-weighted price/fair value ratio of 0.78. While investors are right to be somewhat concerned about energy-related credit losses, currently low interest rates, and possible interbank contagion, the magnitude of the coming losses priced into many bank stocks is overdone, and we find many to be sporting attractive valuations today.

We believe most bank's exposure to the energy sector is ultimately manageable. And we believe fears regarding counterparty risk and notional derivative exposures are also overblown. Net exposures to individual asset classes, events, or counterparties are relatively manageable, especially in the case of interest rates, which make up a bulk of reported notional exposures.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Elizabeth Collins, CFA  is an associate director of equity research with Morningstar.