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U.S. stocks have been on a tear in the past two months, which is saying something given that the big selloff in late February made many wonder if the party was over. Whether it qualifies as a "mini-correction" or something else, the 4% decline seems a distant memory.
The Dow Industrials, in particular, have been on a seemingly relentless ascent, hitting record highs on a regular basis, breaking through 13,000 and making a move towards 14,000. The S&P 500, has been playing catch up, but it has managed to regain the 1500 level after a near-seven year absence and is within striking distance of its all-time high.
Stocks have benefited from surprisingly strong first-quarter earnings as well as relatively positive economic data, the housing sector excepted, of course. The Fed --which meets Wednesday--has shown no inclination to cut interest rates anytime soon, but that isn't rubbing investors the wrong way. The weak dollar, despite all of its implications for the twin deficits, appears to be helping. And an inverted yield curve, which often indicates a recession down the road, has yet to shake confidence.
No surprise then that Goldman Sachs' Chief U.S. Equity Strategist Abby Joseph Cohen has raised her year-end forecasts for the Dow 30 and S&P 500; she now sees the blue-chip index hitting 14,000 and the broader market barometer touching 1600. Short term, analysts are sounding a more cautious note.Cohen says investors should rotate from housing to capital goods and exporters.
With a market move of this kind, it's appropriate to drill down for answers as well as take a look at some key sectors from financials to telecoms to utilities.
Financials
Jeff Harte, analyst at Sandler O’Neill, told CNBC’s “Squawk Box” that many internationally focused financial stocks are undervalued.
“My thesis has been that it’s been a tough environment if you’re a domestic-centered bank,” Harte said Tuesday. “The yield curve is flat and credit is probably not going to get a lot better. But from a cyclical standpoint, there’s still a lot of upside revenue-wise from global investment banks.”
He likes Goldman Sachs [GS
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“I’d probably highlight Morgan Stanley as the one that has some of the best positioning, but is trading at a discount to it’s closest peer, Goldman Sachs,” Harte said.
He said the stocks aren’t bargains, but aren’t expensive, either.
“The way you typically value a broker is a price-to-book multiple,” Harte said. “That’s because the earnings can be volatile. On a price-to-book basis, the stocks are trading a little over two-times book. They should be trading higher than that. So, they’re certainly not bargain-basement valuations, but given how good their earnings have been, I’d argue the price-to-book multiple should be quite a bit higher.”
Harte said the stocks offer investors the opportunity to get back to basics.
“One of the things I like about the investment banks is you’re making a play on the history of cyclical economics – not trying to forecast what the Fed is going to do next,” Harte said. “My bet is the Fed is going to stay pat for quite a while and maybe, if anything, start raising – not cutting. If the Fed starts cutting rates, it’s for all the wrong reasons, implying that the economy is going the wrong way.”
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