In line with my previous predictions, positive macro trends have resulted in very strong earnings growth for S&P 500 companies. Moreover, there are many reasons to believe that, despite stocks’ tremendous rally since October 2022, equities are not overvalued at this point. Also importantly, due to multiple factors, the valuations of equities outside of tech are currently very attractive. Therefore, investors looking for stocks to buy now should consider some names that are in spaces other than tech.

Very Strong Earnings Growth for the S&P 500

The fourth-quarter profits of S&P 500 companies are on track to jump a very strong 9%, Reuters reported on Feb. 9. Also noteworthy is that 81% of the index’s firms that have reported their Q4 results so far have beaten analysts’ average estimates.

That’s a significant increase from the 76% of companies that have surpassed the mean profit estimates “in the previous four reporting periods,” the news service noted.

As of Jan. 1, analysts, on average had only expected S&P 500 earnings to have risen 4.7% in Q4. As I’ll explain in the next section, the firms’ outperformance suggests that the index’s valuation is not as high as it may appear on the surface.

One Key Reason Why Stocks May Not Be Overvalued

Officially, the S&P 500’s forward price/earnings ratio, based on analysts’ average 2024 earnings per share estimate for the index, is 20.3. That’s meaningfully higher than the mean P/E ratio over the last five years, which is 18.9. It’s also significantly above the ten-year average of 17.7.

As a result, many analysts are saying that stocks’ valuation is currently high or at best fair at this point.

But as I reported in the last section, the Q4 profits of S&P 500 firms are growing at a 9% year-over-year rate, way higher than the 4.7% increase that analysts, on average, had expected at the beginning of 2024.

The discrepancy leads me to believe that, even in recent weeks, many analysts have still been underestimating the strength of the economic expansion and its positive impact on equities, Therefore, I think there’s a very good chance that the analysts’ mean S&P 500 EPS estimate, which of course constitutes the all-important numerator in the forward price/earnings ratio, is far too low.

Let’s say, for example, that the index’s EPS comes in 10% above analysts’ current average outlook, which is about $245. That would put the index’s true EPS at roughly $269. As a result, the forward P/E ratio of the index would be 18.7, slightly below the average valuation of the last five years and not very much above the mean valuation of the previous decade.

An Expert Weighs in on the Valuation Issue

Speaking on CNBC recently, University of Pennsylvania Professor Jeremy Siegel, considered an expert on U.S. stocks, said that while a forward price-earnings ratio of 20 times for the S&P is “not cheap,” the index is not nearly as expensive as it was in early 2000. At that time, according to Siegel, the S&P’s forward price-earnings ratio was 30 times, while tech names were changing hands for 60 to 70 times forward earnings. As of the end of last year, an “expanded” group of tech stocks were changing hands for 27.2 times forward earnings, according to WisdomTree Investments.

Siegel added that many less popular stocks have rather low valuations. “Value stocks and small stocks have lagged tremendously. With value stocks at 15 times earnings and small stocks at 12 times earnings, I think that’s where the best opportunities are,” he said.

One Non-Tech Sector to Consider

Firms that specialize in selling construction equipment or managing construction generally have rather low valuations. For example, the forward price-earnings ratios of construction machinery makers Caterpillar (NYSE:CAT) and Manitowoc (NYSE:MTW) are just 15.4 and 11. This makes it one of those stocks to buy.

Similarly, the forward P/E ratio of engineering and construction manager Fluor (NYSE:FLR) is 14.6, while that of construction company Sterling Infrastructure (NASDAQ:STRL) is a relatively low 17.6.

Yet these firms are generally reporting quite strong quarterly results. For example, CAT’s “consolidated operating profit” soared 87% last quarter versus the same period a year earlier, while FLR’s net earnings came in at $181 million in Q3, up from a loss of $24 million in Q3 of 2022.

Consequently, I recommend that investors looking to buy stocks now consider buying one or more of the names in this sector.

On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.