MW This factor makes 11 stocks look like better bargains even after they soared in 2024
By Philip van Doorn
Some stocks' price-to-earnings valuations declined even as they outpaced the S&P 500's big gain
The most commonly cited valuation measure for stocks is the forward price-to-earnings ratio. This is a stock's current price divided by the consensus estimate for the company's earnings per share over the next 12 months among analysts working for brokerage firms or for research firms that provide information to brokers. And the S&P 500's rising forward P/E ratio is often cited as a reason investors had better expect a broad decline for stocks.
But some stocks in the S&P 500 SPX outperformed the index as a whole last year while their forward P/E ratios declined. This means rolling consensus earnings estimates were rising more quickly than the share prices. This action was predicted for some stocks by BlackRock Chief Executive Larry Fink in October, when he was asked about the market's high valuation.
A combination of price momentum and a declining forward P/E could indicate support for further gains in 2025.
Getting back to the overall concern about elevated valuation levels, investors should always expect broad declines for the stock market as they pursue long-term growth. Consider that over the past five years, the S&P 500 has returned 97% with dividends reinvested, even though it fell 18.1% during 2022. The index's average annual return over the past five years has been 14.5%, according to FactSet, compared with a 30-year average annual return of 10.9%. So the past five years as a whole have been stellar for investors in index funds such as the SPDR S&P 500 ETF Trust SPY -provided that the investors have resisted the temptation to sell into declining markets.
Before listing the stocks that performed the neat trick of outperforming the S&P 500 while their forward P/E ratios declined, let's summarize how the weighted valuations for the index and its 11 sectors changed during 2024. Going forward, all price changes in this article exclude dividends.
Here are the 11 sectors of the S&P 500 sorted by their year-end forward P/E ratios, with the full index at the bottom.
Sector Forward P/E Forward P/E a year ago Forward P/E to 5-year average Forward P/E to 10-year average 2024 price change
Consumer Discretionary 29.3 26.3 93% 109% 29.1%
Information Technology 28.8 26.6 116% 141% 35.7%
Industrials 21.7 20.1 102% 113% 15.6%
Consumer Staples 21.5 19.3 106% 109% 12.0%
Communication Services 19.5 17.3 101% 103% 38.9%
Materials 18.3 19.3 102% 108% -1.8%
Real Estate 17.6 18.1 91% 93% 1.7%
Utilities 17.3 15.7 97% 99% 19.6%
Health Care 16.8 18.1 99% 102% 0.9%
Financials 16.5 14.6 109% 115% 28.4%
Energy 13.6 11.1 615% 97% 2.3%
S&P 500 21.6 19.7 108% 117% 23.3%
Source: FactSet
You might need to scroll the table to see the 2024 price changes in the right-hand column.
The full S&P 500's forward P/E has increased to 21.6 from 19.7 a year ago, and you can see it trades well above its 10-year average valuation. The contrast between the current valuation and the 10-year average is most extreme for the information technology sector, even though the consumer discretionary sector now has the highest forward P/E.
Keep in mind that not all Big Tech stocks are within the information technology sector. Amazon.com Inc. $(AMZN)$ and Tesla Inc. $(TSLA)$ are in the consumer discretionary sector, while Alphabet Inc. $(GOOGL)$ and Meta Platforms Inc. $(META)$ are in the communications services sector.
Stock screen: Prices soared while forward P/E ratios declined
Among the components of the S&P 500, 144 stocks showed higher 2024 price increases than the 23.3% price increase for the index. But only 11 of the outperforming stocks had forward price-to-earning ratios that were down from a year earlier. The stocks are sorted by 2024 price increases.
Company Ticker 2024 price increase Forward P/E at end of 2024 Forward P/E at end of 2023 Progressive Corp. PGR 50.4% 16.7 20.0 International Paper Co. IP 48.9% 18.0 18.1 Amazon.com Inc. AMZN 44.4% 35.1 41.7 Zebra Technologies Corp. Class A ZBRA 41.3% 23.9 24.2 Welltower Inc. WELL 39.8% 66.7 76.0 Allstate Corp. ALL 37.7% 10.2 11.9 Carnival Corp. CCL 34.4% 13.9 18.5 Leidos Holdings Inc. LDOS 33.1% 13.6 14.3 Eli Lilly & Co. LLY 32.4% 34.0 47.4 Norwegian Cruise Line Holdings Ltd. NCLH 28.4% 12.2 16.1 BlackRock Inc. BLK 26.3% 21.2 21.5 Source: FactSet
Leaving the list in the same order, here is a summary of opinion, with consensus price targets for the stocks among analysts polled by FactSet.
Company Ticker Share buy ratings Share neutral ratings Share sell ratings Dec. 31 price Cons. price target Implied 12-month upside potential
Progressive Corp. PGR 70% 26% 4% $239.61 $286.24 19%
International Paper Co. IP 39% 46% 15% $53.82 $58.16 8%
Amazon.com Inc. AMZN 95% 4% 1% $219.39 $243.33 11%
Zebra Technologies Corp. Class A ZBRA 45% 55% 0% $386.22 $423.07 10%
Welltower Inc. WELL 70% 25% 5% $126.03 $145.94 16%
Allstate Corp. ALL 67% 21% 12% $192.79 $228.50 19%
Carnival Corp. CCL 76% 21% 3% $24.92 $28.98 16%
Leidos Holdings Inc. LDOS 71% 29% 0% $144.06 $191.38 33%
Eli Lilly & Co. LLY 78% 19% 3% $772.00 $1,008.45 31%
Norwegian Cruise Line Holdings Ltd. NCLH 59% 36% 5% $25.73 $30.18 17%
BlackRock Inc. BLK 80% 20% 0% $1,025.11 $1,153.56 13%
Source: FactSet
Click on the tickers for more about each company.
Read: Tomi Kilgore's guide to the wealth of information available for free on the MarketWatch quote page
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-Philip van Doorn
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January 02, 2025 09:51 ET (14:51 GMT)
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