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July 11, 2023 at 02:06 PM
The U.S. stock market finished the second quarter up more than 8%, as measured by the Morningstar US Market Index. Through the end of June, the index is up more than 16%.
Heading into the third quarter of 2023, stocks still look undervalued, according to Morningstar’s metrics, but far less undervalued than they looked at the start of the year, investment specialist Susan Dziubinski wrote in a recent blog post.
According to a composite of the stocks Morningstar covers, the U.S. stock market is trading at a price/fair value of 0.95, which translates to a 5% discount to the firm’s fair value estimate at the end of the second quarter. That’s up from a 16% discount to fair value at the start of 2023.
Dziubinski’s colleague and Morningstar chief U.S. market strategist David Sekera wrote in his latest stock market outlook, “In the wake of the first half’s rally, we are seeing several opportunities for investors to reallocate their portfolios to take profits where the market has overextended itself and reinvest those gains in undervalued areas that have been left behind.”
Dziubinski summarized how stock market valuations look through several different lenses. “By investment style, small value stocks are the most undervalued stocks right now, trading 42% below our fair value estimate,” she wrote. “Meanwhile, large growth stocks are just 1% undervalued, and large core stocks are 2% overvalued.
“By sector,” she continued, “communication services and real estate are currently the most undervalued sectors today, trading at 21% and 17% below Morningstar’s fair values, respectively. Technology stocks are about 7% overvalued.”
As for a company’s competitive advantages, as determined by Morningstar’s Economic Moat Rating, wide- and narrow-moat stocks are undervalued by 3% and 6%, while no-moat stocks are 16% undervalued.
See the gallery for Morningstar’s top underpriced stock picks for the third quarter of 2023.
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