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Market Update

U.S. Equity Market Valuation Update: Stick With Value

Value stocks struggled in July, but we continue to see this category as the best opportunity for long-term investors.

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During July 2021, investors became increasingly concerned about both the sustainability of the pace of the economic recovery and the potential impact that the delta variant of the coronavirus may have on the path to economic normalization. As such, value stocks, which are more highly leveraged to near-term economic recovery, fell out of favor, and investors rotated back into growth and core stocks, whose values are determined by earnings growth in the future. For the month, the Morningstar US Value Index dropped 0.14%, whereas the US Core and US Growth indexes rose 2.87% and 2.86%, respectively.

While we are monitoring the data and studies coming out regarding the delta variant, we do not think it will meaningfully derail economic normalization and recovery. According to our valuations, we continue to see the best opportunity for long-term investors in the value category, especially among small-cap stocks, which we view as undervalued. Overall, large-cap stocks are fairly valued and have the best opportunities for investors. Core stocks, however, remain overvalued across the board.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.