No fireworks this week. As everyone in the US gears up for a holiday weekend, the feel of summer is upon the markets as trading volumes decline and the equity markets move back and forth each day with little cumulative gain or loss. So far the S&P 500 is up 8% year-to-date with most of the sectors in positive territory. That said, the two standouts are technology (+13%) and healthcare (15%). Technology has benefited from key leaders’ like Amazon march higher. Technology currently represents almost 25% of the S&P 500 – well above the 20% threshold which, when exceeded by other sectors historically, has indicated future downfall. That said, who knows when. Trading at an 18x P/E multiple, technology’s valuation is in-line with the broad index and is just getting back to levels seen pre-crisis though far below the bubble days of the late 1990s. Healthcare on the other hand is trading at a lower 16x P/E multiple. The stocks seem to be doing fine during the ailing debate of repeal/replace of the Affordable Care Act.
Meanwhile, energy has been the laggard. Down 14% this year, the sector has not only struggled due to falling commodity prices but also service costs that are on the rise in some areas (such as the Permian) putting a squeeze on expected earnings thus the elevated 24x P/E ratio. All that said, the overall index is priced at 18x which is a full valuation expectant of solid earnings growth. Looking out, only a boost from tax reform which has been thought dead given the other travails of the administration could give a boost. If it has any hope, it will not be seen until later this year or early next which means while traders are off on summer vacation, this market is likely on a round-trip to nowhere.