William Gabrielski at TheStreet.com notes a change of opinion for one Wall Street strategist. Poor market and consumer sentiment and favorable market valuations have gotten Citigroup’s Tobias Lefkovich to become much more bullish. To take advantage of this market:

To participate in the upside you will have to look away from the current leadership provided by energy stocks, Lefkovich believes. His downgrade of the group on Oct. 7 to underweight, while not perfectly timed with the recent pullback, was pretty timely given the group’s tough going last week.

Lefkovich maintains overweight ratings on consumer discretionary stocks, financials, health care — with an emphasis on pharmaceuticals and biotech — and semiconductor and software stocks. In addition to energy, Lefkovich recommends underweighting utilities, consumer staples, industrials, materials and telecom services.

John Hussman at Hussman Funds notes that while market valuations on the face of it do not look all that bad. However when you look below the surface the market’s high earnings (and subsequent P/E ratio) is driven by unusually high returns on equity (ROE). Hussman does not believe these ROEs are particularly sustainable:

In any event, one needn’t assume that ROE will revert to its historical norm of 11-12% to understand that current ROE levels are unlikely to be sustained indefinitely. That’s another way of saying that P/E ratios, currently benefiting from high profit margins and other factors, may start looking more consistent with other fundamentals like price/book, price/revenue, and price/dividend ratios: really, really high

That is not to say that both parties can not be correct. Lefkovich could be right in the short term, while Hussman’s observation may be correct in the long term. Only time will tell.

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