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Charles Schwab chief investment strategist Liz Ann Sonders joins Market Domination Overtime to discuss the state of the market (^DJI, ^IXIC, ^GSPC) and its current valuations after the most recent bout of volatility (^VIX).
"Valuation is marginally better thanks to the pullback. We did see a little bit of an easing in some of those mega-cap names. But we're still in the high 20s [percent] for the Magnificent Seven. So you are at that point, especially given we've seen some deterioration in third quarter consensus estimates relative to second quarter, that we are a bit in that show-me environment because of valuation expansion that predated this recent pullback," Sonders explains.
She notes that stocks outside of Big Tech's Magnificent Seven are "more reasonable" in terms of their valuations and that only 11% of the S&P 500 (^GSPC) has outperformed the index itself. As the market broadens out, she argues, "I think that to some degree is this idea that there is value to be found outside of that small subset of prior leadership names."
I'm curious after this rebound we've seen here. Uh your take on valuation and sentiment.
Valuation is marginally better thanks to the pullback. We did see a little bit of an easing in those, some of those mega cap names, but we're still in the high 20s for the magnificent seven. So you are at that point, especially given we've seen some deterioration in third quarter consensus estimates relative to second quarter, that we are a bit in that show me environment because of valuation expansion that predated this recent pullback. Outside of the magnificent seven, you're in the mid to high teens, a bit more reasonable terms of valuations. And I think that's one of the reasons why we've seen this broadening out. If you go back the past year, only 11% of the S&P's constituents have outperformed the index itself. Over the past month, it's 65% of constituents. And I think that to some degree is this idea that there is value to be found outside of that small subset of prior leadership names.
And let's say more more specifically, just sector-wise, or or or some of the trends that you're watching, where else are you finding that value? Clearly there has been a lot of excitement play out in the market outside of tech.
Yeah, we think leadership has been and will continue to be more consistent at the factor level or characteristic level. And we've been suggesting staying up in quality in terms of factors. So factors in focus for us would be profitability, strong free cash flow, strength of balance sheet, high interest coverage, but also bringing in that those value components. It's almost like what we what we used to talk about a lot as being a garb approach, growth at a reasonable price. So we think you're better served taking more of a factor approach and applying that factor analysis, that factor screening across the spectrum of cap indexes and across the spectrum of sectors versus the more monolithic call that comes with trying to make a sector decision.
Lizanne, we are always lucky to have you on the show. Thanks for joining us.
Thank you very much. My pleasure.
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This post was written by Melanie Riehl