As the first quarter data fade in the rear view mirror, we still continue to expect eventual better economic numbers to meet the conditions the Fed laid out for raising rates: continued improvements in the labor market along with reasonable confidence of inflation returning to target over the “medium term”.
Mature tech stocks such as Apple (AAPL), Intel (INTC), Microsoft (MSFT), and Google (GOOG) are not only cash-rich but also have robust earnings positions. The absence of excessive debt and their cash-rich balance sheets make them well-poised for any rate hike in the future. The above graph shows the cash holdings of major mature tech stocks.
Financials look attractive on the basis of relative valuation. Most of the S&P 500 sectors are valued higher than their historical averages, as you can see in the above graph. However, financials look relatively attractive compared to the rest of the market. Forward price-to-earnings multiples are hovering around 13x.
Large cap financials involved in capital market operations are also likely to benefit from the expansionary monetary policy followed by most of the global market (ACWI). This helps merger and acquisition (or M&A) activity.
Today’s economic environment makes it all the more important to find opportunities abroad and benefit from diversification. Europe (EZU) (VGK) and Japan (EWJ) both look attractive since central bank action is spurring equity markets in both nations. The above graph shows how European and Japanese equities have outperformed the S&P 500 in 2015 so far.
Stay cautious of two important data indicators in the future: inventories and consumer spending. A rise in both indicators would bode well for GDP growth next quarter. However, a decline could signal weakness in the economy.
Read our series on Will the US Economy Rebound as Expected in the Second Quarter? to find out the possible headwinds for growth in the next quarter.