M12 BARRON’S October 26, 2020
Market View
Inflated Tech-Sector P/Es
Morning Briefing
Yardeni Research
yardeni.com
Oct. 22:The S&P 500 Information Technol-
ogy sector is expected to have revenue
growth of 3.5% this year and 8% in 2021.
That’s expected to lead to solid earnings
growth of 4.2% in 2020 and 13.6% in 2021.
Analysts’ net earnings revisions have been
positive in October (12.6%), September
(15.1%), and August (9.4%).
The sector’s forward price/earnings ratio,
at 27, is high but not outrageous. It has risen
since the 2008 recession, when the sector’s
forward P/E hit a low of 9.9 in November
- However, it’s only roughly twice the
expected forward earnings-per-share growth
rate and far below the P/Es in the 40s during
the tech bubble.
More concerning are the increases in some
tech-related industries’ forward P/Es. The
Internet & Direct Marketing Retail industry,
which boasts Amazon.com as a member, has
a forward P/E of 67.6, up from 40.8 a year
ago. The Movies & Entertainment industry,
which contains Netflix, has a forward P/E of
56.4, more than double the 26.3 of a year ago.
Lastly, the Application Software industry has
a 49.8 forward P/E, up from 33.6 a year ago.
—EDYARDENI
GM: Emerging Leader in EV
Ivan Feinseth Market View 360
Tigress Financial Partners
tigressfi.com
Oct. 21:Last nightGeneral Motors[GM]
debuted its revolutionary GMC Hummer EV
[electric vehicle] supertruck with the premier
model starting at $112,600, further emphasiz-
ing its drive to become a leading EV manufac-
turer. GM’s industry-leading Cotillion Drive
technology, together with its autonomous-
vehicle-technology development company
Cruise, will position GM as the leading global
automotive technology company. The Ultium
Drive development comes as part of GM’s
commitment to investing $20 billion on EV
development over the next five years and
plans to sell one million EVs per year by
- GM will commit $20 billion of additional
capital and significant engineering resources
for EV and autonomous-vehicle development.
GM has also raised close to $8 billion in out-
side investment for its Cruise autonomous-
vehicle-development technology division, most
recently valuing it at almost $19 billion, which
is about 40% of GM’s current total equity
market value of just over $46 billion....GM’s
ability to convert its massive manufacturing
infrastructure to develop and manufacture
EVs best positions it to be the industry leader
in EV and autonomous technology. I believe
significant upside exists for long-term inves-
tors and continue to recommend purchase. I
also believe that GM will reinstate its recently
suspended dividend by the end of this year.
—IVANFEINSETH
Sunny Outlook for Housing Starts
Economic Update
Regions Financial
regions.com
Oct. 20:September is typically a seasonally
weak month for residential construction,
with both permits and starts tending to
decline from August’s levels. While our fore-
cast anticipated declines in permits and
starts, we thought those declines would be
much smaller than is typical for September.
Instead, both permits and starts increased.
To show how atypical this is, there wasn’t a
single year over the 2000-19 period in which
unadjusted single-family permits rose in the
month of September.
This simply shows how much momentum
there is in new single-family construction.
With inventories of existing homes for sale
being so low for so long, the push to the
exurbs being greatly accelerated by the
effects of the pandemic, including changing
work arrangements, and notably low mort-
gage interest rates, the stars are aligned for
robust growth in demand for new single-
family construction. As of September, the
running 12-month total of not seasonally
adjusted single-family starts, which we see
as the most reliable gauge of the underlying
trend rate of construction, stood at 929,400
units, the highest such total since March
- Even so, builders continue to fall fur-
ther behind growth in orders, with the num-
ber of single-family units permitted but not
yet started rising steadily over the past sev-
eral months and topping the 100,000-unit
mark in September. As such, builders will
be busy for some time to come. Still, we do
think it worth noting that, even with mort-
gage rates unlikely to stray very far, there
are threats to demand for single-family
homes, with affordability constraints and a
meaningful deterioration in labor-market
conditions the main potential threats.
—RICHARDF.MOODY
China’s Bull Market
Cumberland Advisors Market Commentary
Cumberland Advisors
cumber.com
Oct. 19:The Chinese equity market has re-
covered strongly this year. The CSI 300 In-
dex, which covers the top 300 stocks traded
on the Shanghai Stock Exchange and the
Shenzhen Stock Exchange, is up some 17%
this year. The S&P China BMI Index, which
covers the investible universe of publicly
traded companies domiciled in China but
legally available to foreign investors, is up
some 23%. In comparison, the S&P 500 in-
dex is up 10.3% year to date. The inflow of
global funds into the two mainland China
markets this year has topped $26 billion....
U.S. institutional investors have just
demonstrated their support for a continued
strong linkage between the U.S. and Chi-
nese financial markets by ordering more
than $27 billion in response to China’s first
bond offer made directly to U.S. buyers.
The bond offer was for $6 billion, and the
yield on the 10-year component was about
0.5 percentage points above the equivalent
U.S. Treasury. The huge China onshore
bond market is estimated as the second
largest globally. In contrast, the China off-
shore market is now small but has huge po-
tential, as the bond sale to U.S. investors
suggests. Participating in and helping to de-
velop these markets together with the Chi-
nese pensions and insurance markets will
become important for U.S. financial firms.
—BILLWITHERELL
Small-Cap Earnings Momentum
Weekly Market Commentary
LPL Financial
lpl.com
Oct. 19:During recessions, smaller companies,
which generally tend to have weaker balance
sheets and more economically sensitive reve-
nue, are usually hit harder than their large-
cap brethren. That has certainly played out
this year, with the latest FactSet consensus
estimates calling for an 18% annual decline in
large-cap (S&P 500) earnings compared with
a 61% decline in small-cap (Russell 2000)
earnings. As stated previously, we suspect the
U.S. economy has already emerged from the
recession. While small-cap market returns are
typically strong coming off bear-market bot-
toms and out of recessions, strong earnings
growth usually follows. Case in point, for 2021
small-cap earnings are expected to rebound
sharply—potentially by 180%, based on the
latest FactSet estimates—to more than 10%
above 2019 levels. Simply put, greater eco-
nomic sensitivity provided by small-cap stocks
compared with large-cap stocks may be help-
ful when economic growth expectations go
from bad to less bad, and eventually to good.
Further, consider that small-cap earnings
momentum has been quite positive. Since
June 30, 2020, small-cap earnings estimates
for 2020 have been revised about 12 per-
centage points higher, more than the four to
five percentage points for large-caps. For
2021, earnings growth for small-caps has
been revised more than 30 percentage
points higher, while large-cap estimates
have increased by only two points.
—JEFFREYBUCHBINDER
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”GM’s ability to convert its massive manufacturing infrastructure to develop and manufacture EVs best
positions it to be the industry leader in EV and autonomous technology.”—IVANFEINSETH,Tigress Financial Partners
This commentary was issued recently by money managers, research firms,
and market newsletter writers and has been edited by Barron’s.