Five outperforming corners of the market could have more room to run

The S&P 500 has rocketed off its December lows, but some areas of the market have performed even better.

Rallies in the banks, semiconductors, homebuilders, industrials and energy have driven the broader market higher. The best of those — including the KBE bank ETF and SMH semiconductor ETF — are up around 30 percent from their December bottoms.

“We’ve certainly bounced back, and what’s interesting is these are more risk-on areas of the marketplace,” Todd Rosenbluth, director of ETF and mutual fund research at CFRA, said on CNBC’s “ETF Edge” on Wednesday. “They struggled in the fourth quarter, a reminder that you can’t look backward when you’re choosing ETFs but forward.”

The SMH ETF, for example, closed out December with its worst quarterly loss in a decade. Now it is on track for its best quarter since 2016.

These outperformers should continue to drive the market rally, says Rosenbluth.

“Many of these are areas where we still define the fundamentals as strong,” he said. “We still think there’s room to go in the broader market as long as the Fed stays on hold and so long as the earnings remain really strong.”

Kim Arthur, founder and CEO of Main Management, says sharp sell-offs late last year may have made these areas more attractive to value investors and still offer opportunity.

“In the fourth quarter, we had a discounting of an economic recession and an earnings recession,” Arthur said Wednesday on “ETF Edge.” “The multiples on the market are 16.5 times. That’s average forward multiples. So it’s not like things have gotten crazy.”

The S&P 500’s multiple fell to below 14 times forward earnings in December, its lowest level since mid-2013. It has since bounced back above 16 to a price-to-earnings ratio last seen in October.

“The regional banks which were beaten down last year, those are at the top of the leader boards,” Arthur said, by way of example. “The reason why they’re still trading is they’re trading at just over 10 times when their average should be closer to 14 times. They’re 3.5 multiple points below.”

The KRE regional bank ETF tumbled more than 16 percent in December, its worst monthly performance since the beginning of 2009. Its valuation bottomed below 10 times forward earnings during the worst of the sell-off.