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Quarter-End Insights

Quarterly Market Outlook: North American Stocks Only a Little Overvalued

The broad equity market is trading at a 3% premium to our fair value estimates.

David Sekera

Based on the capitalization-weighted intrinsic value of the stocks we cover in North America, we view the broad equity market as 3% overvalued. Some undervaluation remains, but opportunities are shrinking and highly idiosyncratic. Across our North American coverage, only 14% of stocks had 4- or 5-star ratings compared with 18% at the end of 2020. Just one year ago, 67% were rated 4 or 5 stars as markets overreacted in the early throes of the pandemic. Since the beginning of 2005, only 20% of the time have we had as low of a percentage of stocks that we rated as undervalued. By sector, energy remains the most undervalued by far, followed by utilities and communications. In the Morningstar Style Box, both the large- and small-cap value categories are modestly undervalued.

  • Even after incorporating our recently increased expectation for a strong economic resurgence in 2021 and for that momentum to carry into 2022, we think the broad U.S. equity market is 3% overvalued.
  • Last quarter, we highlighted that energy was significantly undervalued. Energy stocks have surged quarter to date, but at a price/fair value of 0.82, we continue to view the sector as undervalued. 
  • Value stocks outperformed in the first quarter, but remain slightly undervalued; however, small-cap stocks are now slightly overvalued following their outperformance this year.

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