Investing.com -- HSBC (LON:HSBA) analysts believe investors should look for opportunities among stocks with less demanding valuations as the S&P 500 reaches record levels.
The benchmark index is currently trading at a premium of over 15% above historical averages, and even when excluding major tech and other large companies, valuations remain higher than historical norms. Out of 12 sectors in the index, seven are trading at more than a 10% premium to their historical averages.
Analysts pointed out that the high valuations are largely attributed to the dominance of "big" companies in the index, encompassing not just Big Tech but also big retail, big banks, and big pharma.
These corporations have significantly contributed to the equity index returns this year, with a handful of companies in most sectors accounting for more than half of the sectors' returns.
“These “big” companies report above-average earnings growth, with average earnings growth 20pps higher than the sector average and above average profitability with most Return on Equities (ROEs) topping 30%,” HSBC analysts noted.
“As such, these “big” companies have been rewarded with premium valuations, trading at forward price-to-earnings of over 30x, on average. “
Despite the current market conditions, HSBC believes that there are still opportunities to invest in companies with less demanding valuations. They have identified a range of buy-rated companies across various sectors, including financials, consumer discretionary, and tech, that trade at a 15% discount or more to their sector averages.
Some of the highlighted stocks include Target Corporation (NYSE:TGT), Biogen (NASDAQ:BIIB), Cisco Systems (NASDAQ:CSCO), Salesforce (NYSE:CRM), Johnson & Johnson (NYSE:JNJ), and several others.
At the same time, HSBC analysts advise against positioning into small caps at this time. They stress that small caps historically tend to underperform following a Federal Reserve easing cycle, which is not typically accompanied by a recession.
With expectations of a gradual easing cycle and additional rate cuts bringing the target range to 3.25-3.50% by the Federal Open Market Committee (FOMC) by September 18, 2024, HSBC anticipates that while lower rates may provide some relief, refinancing for small caps could occur at rates higher than historical averages. Also, the gap in profit margins and ROEs between small caps and their larger counterparts remains significant.