With the S&P 500 climbing back from the February lows of the pandemic last year to score 16% gains by the close of 2020, many investors are now concerned that stocks and index ETFs are due for a pullback.
The S&P 500′s 12-month price-to-earnings ratio is at a premium of 45% to its 20-year average. As a result, the CFRA projects a 2021 earnings increase for the S&P 500 Growth component of the index at 13.3% versus 20.1% for its value group.
Over 150 years of history, the Shiller P/E ratio for the S&P 500 has a mean of 16.8 and a median of 15.8. Currently, the Shiller S&P ratio for the S&P 500 is 34.5, which is more than twice its historic average.
According to a new survey from E-Trade Financial, however, rather than running to cash or other safe haven assets, many investors are turning to undervalued sectors of the market.
Looking at the survey, just 9% of millionaires surveyed by E-Trade feel that the market is still far from a bubble, with 16% believing we’re “fully in a bubble”, 46% claiming we are in “somewhat of a bubble”, and 29% feeling the market is approaching a bubble.
These same investors are actually increasing their risk tolerance in the first quarter of 2021, with the expectation that stocks will finish Q1 with more gains, as bubbles can often move higher in their final stages.
A Bubble Ahead?
So what makes these investors so confident of further upside in stocks and index ETFs?
With the rollout of the coronavirus vaccines from Pfizer and Moderna in process, along with a potentially greater stimulus package from President-elect Biden, investors foresee more gains ahead.
“There is a broader recognition of an economy that is improving and signs that the factors are in place for the market to move higher,” said Mike Loewengart, chief investment officer at E-Trade Financial’s capital management unit.
The survey from Morgan Stanley’s E-Trade was conducted from January 1 to January 7 among an online U.S. sample of 904 self-directed active investors who manage at least $10,000 in an online brokerage account, and found that millionaire investors are placing a greater focus on underperforming areas of the stock market.
Among the key findings of the survey are that millionaire investors are becoming more bullish and aggressive in late stages of the bubble than fellow investors, are not projecting massive returns, and are looking outside of technology for opportunities, specifically into more cyclical growth stocks. Nevertheless they recognize that stay-at-home could be here to stay, presenting opportunities for investment in tech and international stocks.
“Everything outside of big tech became better potential opportunities,” Loewengart said.
“We can talk a lot about how the stay-at-home trade is over and other segments are poised to do better, but when we see sector expectations being similar, that is also a reflection of the market being tied to tech and the fact that the world has changed as a result of Covid,” Loewengart said. “Some things will not return to way they were before, and we will see multiple expansion in big tech names,” he said.
Over the last three years, the S&P 500 has trounced the S&P developed international and emerging market indices. The last time those international markets outperformed the U.S. large-cap index was 2017. This means that there may be ample opportunity for foreign investment.
ETF investors looking to emulate this millionaire strategy can look at international ETFs like the ERShares International Equity ETF (NYSEARCA: ERSX) and cyclicals like the WisdomTree U.S. SmallCap Dividend Growth Fund (NasdaqGM: DGRS). It also means that big tech ETFs like the ARK Web x.0 ETF (NYSEArca: ARKW) could continue to shine.
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