The U.S. stock market was up by more than 14% for the year to the end of the third quarter as measured by the Morningstar US Market Index, investment specialist Susan Dziubinski reported in a blog post this week. At the start of the new quarter, stocks were trading 3% above Morningstar’s fair value estimate, she wrote.
In his fourth-quarter stock market outlook, Morningstar chief U.S. market strategist David Sekera commented on what that may mean for the remainder of the year:
“With the market trading slightly above fair value and almost 40% of market capitalization concentrated in just 10 mega-caps whose valuations are mostly leveraged to the buildout of artificial intelligence, it feels like there is no margin for error to deviate from our robust AI forecasts. Many AI mega-cap stocks already trade near or exceed our fair value estimates, offering no cushion should AI growth slow.”
Dziubinski noted in her post how stock market valuations look from two different perspectives. By investment style, small-value stocks are the most undervalued at present, trading at a 26% discount, while large- and midcap growth stocks are the most overvalued.
By sector, utilities and financial services stocks look the most overvalued heading into the fourth quarter, while energy, health care and real estate look undervalued.
Dziubinski said Morningstar defines “undervalued” stocks as those that trade below the firm’s calculated fair value estimate, adjusted for what it calls “uncertainty” — both of which are wrapped into the Morningstar Rating for stocks. Stocks rated 4 and 5 stars are undervalued; those rated 3 stars are fairly valued; and ones rated 1 or 2 stars are overvalued.
See the gallery for 33 undervalued stocks across 11 sectors, as of Oct. 3.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.