Credit Suisse Remains 'On Guard' In U.S. Stocks Despite Attractive Valuations

Credit Suisse's U.S. equity research team, led by Lori Calvasina, released a report titled "August's Sell-Off in a Nutshell."

The analysts began the report by noting that the "rout" in equities over the past few days "should not be surprising" as institutional investors and traders developed bearish sentiments going back to July's reporting season.

Here are some of the key highlights from the report:

Assessing The Damage: Who Performed Better Than Others

• Micro caps and small caps "strongly outperformed" both large and mega caps.
• Defensive sectors (e.g., tobacco, utilities) outperformed non-defensive sectors, while cyclical groups that were "hit the hardest" during earnings season (e.g., semis and semi equipment) "held up better than most."
• Banks and retail (within consumer discretionary) "likely caught investors off guard."
• Energy was the worst performer in small and large caps.

Related Link: As Market Fears Grow, Stay Focused On The Long Term

Valuation Looking ‘Significantly' Better... Don't Buy Yet

• "Extremely high" valuations of U.S. stocks made equities "vulnerable to a negative trigger."
• Data through Monday's close suggest valuations have "improved," but are still "elevated" and not a reason to buy U.S. stocks on their own.
• The analysts "most bullish sign" is their small cap model falling below the lows put in place at the end of September 2014, which is in-line with 2003-2007 lows.
• HC equipment and services, along with pharma/biotech "continue to look highly overvalued.
• Semis, semi equipment, energy and diversified financials look "deeply undervalued," while transportation and media look "particularly undervalued."

International Exposure: What You Need To Know

• Over the past decade, semis and diversified financials have been closely correlated with trends in China's industrial production momentum. The same correlation holds true for large cap banks.
• Identifiable Asia Pacific revenue exposure is 4 percent for small caps and 6 percent for large and mega caps.
• Of note, most companies do not report a breakout for China specific exposure.
• Consensus estimates are calling for negative earnings per share growth in the third quarter for companies with high international revenue exposure.
• "Moderation" in third quarter earnings per share growth is expected for companies with "low or no" international exposure.

Image Credit: Public Domain