Wall Street stocks not too expensive now; Barclays tells investors to remain overweight equities

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S&P 500, NASDAQ, Dow JonesStocks on Wall Street have run-up significantly in the last year as bulls ran wild after the March 2020 sell-off.
(Image: REUTERS)

Stocks on Wall Street have run-up significantly in the last year as bulls ran wild after the March 2020 sell-off. While some believe this has made stocks too expensive, analysts at Barclays think 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 said in a recent note. The multinational investment bank says it is still overweight on equities, seeing positives ahead with better earnings.

Are valuations justified now?

Analysts at Barclays said that earnings growth has brought valuations to more comfortable 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 said. Further Barclays added that the economic backdrop is strong enough at this juncture with policy action likely to stay accommodative for long enough that fundamentals have room to “grow into” valuations.

The stimulus in the United States and the lockdowns have resulted in “forced savings” which are likely to support consumption in the post-pandemic world. This, according to Barclays, will also support the risk 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 likely to stay strong

Earnings in the US stock markets are expected to remain strong in 2021, which has helped Barclay’s remain overweight on equities, choosing them over fixed income. “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 four years after the great financial crisis for earnings to return to their Q2 2007 levels, S&P 500’s earning in the last quarter of 2020 were already higher 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 real estate, saying that the valuation premiums are not justified in these pockets.

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