In the wake of a downturn in US stocks and a robust earnings season, David Kelly of JPMorgan Asset Management has identified an investment opportunity in value stocks as S&P 500 valuations approach historical averages. Today, Kelly highlighted the importance of caution toward big tech due to high price-to-earnings (P/E) ratios.
The S&P 500 has witnessed a 10% drop from its peak in July, accompanied by an anticipated Q3 profit growth of 2.1%, which has brought the index's P/E ratio close to 20. However, excluding the top 10 companies, predominantly big tech, lowers this ratio to 15.6.
The rise in US Treasury yields has led to a diminished demand for risk assets, and profits of index companies have seen a decline for two consecutive quarters through June. Amid these market conditions, Kelly is advocating for underweighting mega caps and overweighting value stocks.
He suggests allowing inflation to decrease and favoring sectors such as energy and finance, which are likely to be more resilient amidst higher interest rates and geopolitical turmoil. He further noted the widening valuation multiple gaps, with the top 10 heavyweights being valued at 26 times projected earnings.
Kelly's insights provide a fresh perspective on navigating the current market scenario marked by fluctuating S&P 500 valuations and changing economic dynamics. His emphasis on value stocks and caution towards big tech underline the evolving investment landscape impacted by factors such as inflation, interest rates, and geopolitical events.
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