Back to top

Image: Bigstock

Fair Value? Yes, Fair Value! Zacks NOV 2021 Market Strategy

Read MoreHide Full Article

The following is an excerpt from Zacks Chief Strategist John Blank’s full Nov Market Strategy report To access the full PDF, click here.


I. Top-Down S&P 500 Year-end 2021 Targets

To Nov. 1st. the S&P 500 YTD gain was +22.5%.

To Sept. 1st, the S&P 500 YTD gain was +20.7%.

The bull trend remains fully intact, heading into the final stretch of 2021.

Across last year, the S&P 500 annual gain was +18.4%. A majority of that gain came in the last two months of the year. That was an above-average annual S&P 500 return.

Next, a table shows Zacks’ updated views on 2021, 2022, and 2023 S&P 500 earnings and “fair value” index calculations.


Zacks Investment ResearchImage Source: Zacks Investment Research


Label an excess over “Fair Value” or “proxies” Zacks shown (above) as the “Fed Money Printing” effect!

Next, factor in investor recency bias. 100% of major asset classes worked out in 2020. 4 of the last 5 years (2016, 2017, 2019, and 2020) were good to long-term investors.
Also factor in this asset allocation set of facts: Negative bond (LQD, EMB, TLT) returns performances are in hand this year. And corporate bond spreads are very tight.

As for underlying U.S. macro fundamentals? They are strengthening. The ADP private payroll data for Oct. was up +571K, after a +523K print in Sept., and +310K in August.

II. Zacks November Sector/Industry/Company Telescope

The NOV Zacks Rank system showed only 3 strong sectors; and 2 were Value sectors. Info Tech, Energy & Financials were those three top sectors; strong in multiple industries.

Industrials fell to an Attractive rating from Very Attractive. Pollution Control (likely the Biden clean energy and climate infrastructure elements) was the new top industry here.

Materials stayed at Very Unattractive from Attractive.

Health Care was a Market Weight. Medical Products looked best. A surprise industry leader. Perhaps Biden health spending effects? Utilities stayed at Market Weight.

Communication Services fell to an Unattractive rating.

Both the Consumer Staples and Consumer Discretionary sector fell to Very Unattractive ratings. The Delta variant and the high CPI seemed to finally hit excess spending.

(1) Info Tech stayed at Very Attractive. Computer Software-Services and Semis (with a global supply shortage) stayed at the top. Electronics looked excellent, again, too.

Top Zacks #1 Rank (STRONG BUY) Stock: Advanced Micro Devices (AMD - Free Report)

(2) Financials stayed Very Attractive. Investment Funds, Finance, Investment Banking, and Real Estate looked good. Lower reserves, more profit from higher stocks and M&A deals.

Top Zacks #1 Rank (STRONG BUY) Stock: The Blackstone Group (BX - Free Report)

(3) Energy
rose to a Very Attractive rating from Attractive. Oil Integrated, Oil E&P, Energy-Alternates, and Oil-Misc. looked the very best. Coal and Pipelines were strong too.

Top Zacks #1 Rank (STRONG BUY) Stock: Chevron (CVX - Free Report)

(4) Industrials
fell to an Attractive rating from Very Attractive. Pollution Control (Biden infrastructure?) Metal Fabricating, Railroads, and Business Services were the top industries.

(5) Health Care fell back to Market Weight from Attractive. Medical Products looked best.

(6) Utilities stayed at Market Weight. Utilities-Gas Distribution was the best. Higher Nat. Gas.

(7) Communications Services fell to Unattractive from Market Weight.

(8) Consumer Discretionary fell to a Very Unattractive rating from Attractive. Autos/Tires/Trucks, Home Furnishing-Appliances and Consumer Electronics were strong and show wealth effects.

(9) Consumer Staples fell to Very Unattractive from Market Weight. Agri-business (commodity price boom) looked best.

(10) Materials stayed at Very Unattractive. Only Chemicals held up.

III. Conclusion

My basic “fair value” point is this:

You need a 21 S&P 500 index forward 12M P/E ratio, and not an 18 P/E ratio to compute a forward 12M “fair value” and see the S&P 500 trade at 4,660. Like it trades at today.

This implies about a 14% to 15% valuation haircut.

At the most recent lows on October 4th, 2021, the S&P 500 closed at 4,300.

In short, my updated “fair value” computations are not out of synch.

Just sober.

That’s it for summary stock market materials.

Consult the entire Zacks NOV 2021 Market Strategy report — for ALL of the latest insights.

Warm Regards,

John Blank

Published in