The U.S. market rebounded a bit Monday after its coronavirus-prompted correction last week. That punchout left the U.S. market ripe for buying, with banks and chip stocks particularly attractive, many macro advisers say.
Banks might even be the front-runner in the buy-the-dip strategy.
All three U.S. indexes rose Monday, with the S&P 500 up 1.67%, after the market last week corrected by more than 14% from its all-time high.
Now, strategists are pointing to a higher-than-usual equity risk premium, currently around 4.87%, compared with the historical average of 3% or a smidgen below.
That premium is the yield on expected earnings for the next year on the S&P 500 minus the 10-year treasury-bond yield. It tells investors how much additional return they can expect from stocks, considering the higher risk of being in equities instead of in bonds.
(Of course, that risk premium may be justified if a recession is around the corner.)
And consensus earnings estimates, currently $178, are likely to come down across industries for 2020. Still, with the 10-year treasury down to 1.07%, stocks could still have considerable upside, especially if economic activity resumes in the second half.
Banks have been beaten up as the yield curve has inverted. Citigroup C, Bank of America BAC and JPMorgan Chase JPM are down 29%, 20% and 17% respectively, from their all-time highs.
The large-cap U.S. banks now trade at their post-2008-2009-crisis average price-to-forward-earnings multiples of 10 times, down from around 12 before when?.
Goldman Sachs banks analyst Richard Ramsden wrote in a note that “the market has largely priced in the impact of both the market correction so far, as well as the change in rate structures.” Ramsden said the market is pricing in three interest rate cuts, lower loan growth, and weaker capital markets revenue.
This adds up to an expected 44% drop in earnings estimates for 2020, although Ramsden sees only an 11% reduction in 2021 estimates.
He sees return on equity falling by an average of 2 percentage points, from around 12%. His analysis says the lowered earnings estimates for 2021 are priced in by 133% for Bank of America, 165% for Citi and 152% from JPM, signifying the group is oversold.
Ramsden did note that adjusting for lowered earnings on the back of lower rates, the group’s average multiple should move to a still attractive 11 times.
As for semiconductors, analysts have said for a week now that chipmakers will be forced to lower revenue and earnings estimates for 2020 by roughly 5% to 8%, depending on the company.
The iShares PHLX SOXX, a prominent semiconductor ETF, is 13% below its one-year high. That’s not horrible compared with the broader market. And many analysts also have said that not only will chip sales lost in the first half more than recoup in the second half, but the 5G cycle will ramp a few months later than expected, creating favorable 2021 comparisons over 2020.
NXP Semiconductor NXPI lowered its first-quarter revenue guidance to $2.13 billion from $2.25 billion. Stacy Rasgon, alliance Bernstein analyst, says the company will have to lower its EPS estimate to about $7 from $8, or about 12%. NXP shares trade at $120.08, representing a 14.8 times forward earnings multiple, which may come down a bit.
In the past five years, NXP has traded at roughly 14 times, although it is now highly exposed to 5G device sales.
On Rasgon's watch list for lowered earnings estimates are Advanced Micro Devices AMD and Qualcomm QCOM.