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The market's 5%-plus pullback over the last month has caused P/E ratios to contract as well. Below are charts of the trailing 12 months P/E ratios for the S&P 500 and its 10 sectors. As shown, after expanding pretty significantly from the start of the year through late May, the S&P 500's P/E ratio has pulled back to 15.56. This is down from a high of 16.37 reached on May 21.

Over the last year, we noted numerous times that valuations for defensive sectors like Utilities were expanding to lofty levels. Because of investors' quest for yield in a ZIRP (zero interest rate policy) world, they ended up placing a higher valuation on a low-growth, high-dividend paying sector like Utilities over a higher-growth sector like Technology. As interest rates have risen recently, we've seen a mass exodus out of defensives, and their P/E ratios have contracted to go with it. At this point, the Utilities sector now has a lower P/E than Technology, but it's still higher than the P/E ratio for Financials and Energy. In our view, the P/E ratio for Utilities still has room to fall to get it more in line with historical levels.

While the P/E for Utilities has dropped down to 14.36, valuations on other defensives like Telecom and Consumer Staples remain high relative to other sectors. Telecom has the highest P/E of any sector at 23.48, while Consumer Staples has a P/E of 17.59. Only Consumer Discretionary and Telecom have a higher valuation than Consumer Staples.

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Source: S&P 500 Sector P/E Ratios