Being primarily interested in longer term valuation metrics, the CAPE ratio applies real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of the business cycle.

Some noteworthy sector observations:

  • Elevated valuations in Technology, Healthcare & Consumer Discretionary
  • Banks & Financials showing single digit CAPEs
  • CAPEs of all other sectors essentially lie between 10 & 20

Looking back through time, several sectors are at their early-mid ’80s level, which compels us to ask whether they now offer good value or whether the outlook justifies current valuations ?

Portfolio positioning becomes particularly important, given significant sector dispersion. How much longer will the Growth oriented sectors dominate benchmark returns before mean reversion takes hold ? Such timing has wrong footed many investment professionals, particularly over the last couple of years.

Diversification hasn’t paid off in recent years, but we suggest it’s more likely to do so over the next few.