Most investors might think that the stock market has become cheap now that the selling pressure has been so strong. The word from Credit Suisse is “not so fast” on being cheap. Less expensive is more like it. Credit Suisse’s U.S. Equity Strategy view was from Lori Calvasina. Her take has been considered contrarian in the past, but as of now her view is that stocks just are still not yet cheap.

Large cap valuations are high and small caps are getting less expensive. She also has several sectors that stand out now.

On the broader markets, Calvasina’s report said:

With early February bringing a fresh wave of pain to US equities in the wake of January’s sell-off, we’ve run a comprehensive update on our valuation models to see where size, style, and sector valuations currently stand.

Again, large cap valuations remain stretched, according to the report. Credit Suisse’s S&P 500 valuation model has come down from the extremes seen in early 2015, but they remain well above its 30-year average. That implies the potentiality for only single-digit returns over the next 12 months.

Is there a bargain forming in small cap stocks? Calvasina thinks that small caps look less onerous. Credit Suisse’s Russell 2000 valuation model has fallen slightly below its 30-year average. It also suggested that the small cap undervaluation relative to large cap has deepened further, with the firm’s relative model just off 1990 lows.

Calvasina also noted sectors that stand out now. The groups that appear most undervalued relative to the broad market include: technology hardware, transports, energy, dividend-paying financials, large cap software and services, large cap media, and small cap capital goods.

There is a warning here about the defensive stocks. Calvasina points out that the market’s defensive groups now appear to be the most overvalued. These include food, utilities, large cap F&S retail, and HC equipment and services.

Note that S&P pointed out on the prior day that the S&P 500 finally has dipped down to about 15.8 times expected 12 month forward earnings per share. That is a tad below the 16 multiple that is the historic average, but investors need to make sure that the “E” for earnings lives up to its end of the bargain.

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