What's the cheapest sector right now?
The ETF tracking the S&P 500's (^GPSC) energy sector (trading under the symbol XLE) has fallen over 15% in the past 12 months but it remains the most expensive sector on a price-to-forward earnings basis.
A measure of value favored by Wall Street, the price-to-forward earnings or “P/E” multiple is calculated by dividing a stock’s price by the earnings expected over the next four quarters. Higher P/E multiples mean the stock is relatively more expensive. P/E multiples can also be used for whole sectors, ETFs, and indices.
Sector | Tracking ETF | P/E NTM | 12 month returns |
Energy | 32.4 | -15.3% | |
Consumer Staples | 20.1 | 1.4% | |
Consumer Discretionary | 19.5 | 14.5% | |
Health Care | 16.7 | 3.0% | |
Information Technology | 16.7 | 5.5% | |
Materials | 16.6 | 5.9% | |
Industrials | 16.1 | -2.9% | |
Utilities | 15.6 | -7.0% | |
Financials | 14.2 | 1.5% | |
Telecommunication Service | 12.2 | 2.2% |
The P/E multiple for the S&P 500 is now around 17.2 the index's forward earnings.
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Energy remains the most expensive due to falling net income margins – even though the XLE is down 15% in the past 12 months. Earnings in the sector have dropped along with energy prices.
Consumer Discretionary stocks are also relatively high but the XLY is up 14.5% in the past year.
On the end of the spectrum, telecom is the cheapest, trading at just 12 times forward earnings. Second cheapest are the financials. That sector's ETF (XLF) is at 14.2 times forward earnings.
Earnings for financial institutions are expected to improve with rising interest rates.
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