Sector and Industry Analysis by May 2021

The US stock market is overvalued. According to Trading Economics, while S&P 500 from January 2020 to today rose by 22.2%, the US GDP dropped by 13% with an unemployment rate above 6%. The S&P 500 has a price-earnings ratio of 44.66, the second highest in history. Similarly, the Buffet Indicator, a ratio of total US stock valuation to GDP, reached 227% as of May 20.

All these indicate overvalued, hot market. However, it doesn’t necessarily mean that the bubble will burst anytime soon. New York Fed’s continuous study on Treasury term spread indicates that bond investors are confident about long term growth of the US market. And Yale’s Stock Market Confidence Index remains at historically average level.

Look for Opportunities

Using the most recent (as of May 29, 2021) market data, we present inter-sector analysis below. Table 1 compares 11 economic sectors in terms of their trailing PE (price-earnings ratio), growth of earnings in the past 5 years, current ratio, and debt ratio (note: due to biased distribution in data, median statistics are presented to reflect central tendency).

Comparison of Economic Sectors in the US Stock Market
Table 1. Comparison of Economic Sectors in the US Stock Market (as of May 29, 2021)

As you may notice, among the sectors, the ones with higher PE don’t necessarily have higher growth rate nor lower debt. Now, take a look at the changes in PE in the past 20 weeks in the market (Table 2).

Table 2. Trailing PE of Sectors (Dec 2020 ~ May 2021)

A couple of noticeable changes: 1. most sectors plummeted in PE 4 weeks ago probably because many firms reported quarterly financial reports then. 2. PE for healthcare sector has remained at 0 during the time period and energy and communication services sectors dropped to 0 too. This can be caused by the fact that the statistics reported are median, which is the firm(s) ranked at 50th percentile in the sector). 3. Technology and consumer cyclical sectors had slight increase in PE in the past week.

Industry Level Comparisons

Sector level comparison isn’t enough as each sector consists of many industries that may differ in nature. For example, if we look more closely at the PE ratios in industries of healthcare, energy, and communication services sectors, here are the respective results.

Based on the data presented above, technology sector seems to be promising based on growth, PE ratio, and debt. In particular, consumer electronics and semiconductor play the major roles in the strong potential of the sector.