Much of the improvement in market fundamentals has been priced in and investors should not get too excited about the decidedly positive tone so far in 2011, according to Brian Belski, the chief investment strategist at Oppenheimer Asset Management.
“As we see it, much of the fundamental improvement over the past several months is already reflected in current prices,” he told CNBC on Wednesday.
Last year’s winners should be avoided, added Belski, who believes it is time to start looking at the 2010 losers.
“We find it particularly troubling, based on our client conversation, that many investors are quite comfortable buying the same stocks that have been going up for the past several months,” he said.
“Many S&P stocks delivered negative performance last year, yet their valuation, earnings growth and liquidity characteristics were quite attractive.”
Belski is therefore overweight the following S&P 500 sectors: consumer discretionary, industrials and information technology. His underweight sectors are telecom services and utilities.
Following two years of double-digit gains for the S&P 500, Belski believes many analysts are now over optimistic with their predictions for the market in 2011.
“We believe that the strategists with the highest 2011 year-end S&P 500 price targets are expecting one of two things to occur: market multiples to expand from current levels or EPS growth to continue its rapid growth,” he said.
Belski believes both scenarios are unlikely to occur.
“First, historical evidence suggests that forward multiples typically shrink after periods of dramatic EPS growth. Therefore, some could argue that market valuations are expensive at current levels,” he explained.
“Current consensus estimates imply that 2011 will be a peak year for S&P 500 earnings. Yet, our work shows that GDP and monthly payroll gains would need to be much higher and the unemployment rate much lower to support that sort of anticipated EPS growth and market performance,” Belski added.
Disclosure information was not available for Brian Belski or his company.