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Quarter-End Insights

Quarterly Market Outlook: Opportunities in Value and Energy Stocks

The broad equity market is trading at a 6% premium to our fair value estimates.

During the fourth quarter, equity prices continued their march higher. Quarter to date through Dec. 21, the Morningstar US Market Index rose 12.78% and year to date has increased 19.37%. By aggregating the fair value estimates of the stocks in our North American coverage, we view the broad market as overvalued, trading at a 6% premium to the capitalization-weighted calculation of our intrinsic value estimates. Much of the broad market-cap-weighted valuation is upwardly skewed by several significantly overvalued mega-cap stocks; even so, the rally this quarter has left far fewer pockets of undervaluation. 

Across our North American coverage, only 18% have 4- or 5-star ratings. Analyzing our sector coverage, only energy remains undervalued. Breaking the market down by the Morningstar Style Box reveals that only value stocks remain undervalued, especially within small-caps.