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Quarter-End Insights

Where to Find Bargains Today? Look to Small- and Mid-Caps, Value Stocks

Several mega-cap stocks significantly overvalued.

By using our bottom-up-derived fair value estimates for individual stocks, we have calculated that the broad equity market is trading near its fair value. Market performance this quarter has mainly been driven by increases in the prices for cyclical and economically sensitive sectors, which have been partially offset by declines in the energy and real estate sectors. Traditionally defensive sectors, such as utilities, have also lagged the broad market returns. In addition, the broad market-cap-weighted valuation is upwardly skewed by several mega-cap stocks that we think are significantly overvalued. As growth stocks have outperformed and several mega-cap stocks have soared this past quarter, the dispersion between overvalued and undervalued stocks has also increased. In fact, the standard deviation of our price/fair value ratio has doubled over the past year.

Morningstar US Market Index posts quarter- and year-to-date gains. - source: Morningstar