LIVE MARKETS-Can still ride the bull, but valuation-weary investors may hop on lower-P/E stocks

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CAN STILL RIDE THE BULL, BUT VALUATION-WEARY INVESTORS MAY HOP ON LOWER-P/E STOCKS

The market's recovery off its early April lows has been impressive. Indeed, the S&P 500 index .SPX has rallied more than 29% off its April 8 close, putting it up about 10% on the year.

Much debate regarding the direction of stock prices going forward remains, but Brian Belski, chief investment strategist at BMO Capital Markets, believes that U.S. stocks remain in a bull market, from both a cyclical and secular perspective.

"Unfortunately, the strong rebound and accompanying new record highs from earlier-in-the-year tariff-induced sell-off has raised concerns about extended market valuation yet again," writes Belski in a note.

He adds, "We agree that market levels for certain metrics are quite high when compared with historical averages, but a closer inspection reveals that levels may not be as severe as are being advertised, in our view."

Belski does not buy any suggestion that U.S. stocks may be headed for a severe or prolonged downturn based on valuation alone. Instead, he continues to recommend that investors “stay the course” and use any potential periods of market weakness as a buying opportunity.

That said, Belski also thinks that valuation-weary investors could potentially benefit by focusing on lower P/E stocks (NTM 12 months P/E of 15x or below) – a strategy that he says has seemingly fallen out of favor in recent years as almost all the focus has shifted towards higher-multiple, growth-oriented investment strategies.

According to Belski, lower P/E stocks have historically outperformed with lower volatility. They can also protect against market losses and also outperform with market strength.

Additionally, he says that lower P/E stocks have historically performed best when market valuation has been extended.

(Terence Gabriel)

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