Prepared by Bespoke Investment Group
There is always a lot of attention paid to the price changes that sectors have experienced during the current bull market, but there's not much focus on the changes in their valuations. Below we take a look at both using a scatter chart that shows the percentage change in both price and P/E ratio since March 9th, 2009. As the price of the sector rises, earnings need to rise just as much or else the P/E ratio will increase. It's common for P/E ratios to expand during bull markets, but a sector becomes more attractive if it can keep its valuation down as its price increases.
In the chart below, the farther to the right on the horizontal axis and the farther down on the vertical axis, the better. In the case of the Industrials and Consumer Discretionary sectors, both have risen by a similar amount, but the P/E ratio has expanded much more for the Industrials sector than for the Consumer Discretionary sector. In fact, the Consumer Discretionary sector has seen the second biggest gain out of all ten sectors during the bull market (behind Financials, which isn't shown in the chart because it had a negative P/E ratio at the start of the bull), yet it's the only sector that has seen its P/E ratio actually decline over the same time period. The Industrials sector is up just a few basis points less than the Consumer Discretionary sector, but its P/E ratio has risen the most of any sector. The Energy sector has seen its P/E ratio expand the second most of any sector, yet it ranks in the middle of the pack in terms of bull market performance. Along with the Consumer Discretionary sector, only one other sector -- Technology -- has seen its P/E ratio expand by less than the overall S&P 500 and its price rise more than the S&P 500.
Below is a table showing the actual P/E ratios for sectors at the start of the bull market as well as currently. It is noteworthy that the Consumer Discretionary sector, while it has seen its P/E ratio decline since the start of the bull market, had the second highest valuation of any sector on 3/9/09. The Industrials sector had the second lowest P/E ratio at the start of the bull market, while it has the highest P/E ratio now.
Copyright © Bespoke Investment Group
