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Market Fair Value Update: Basic Materials Is Overvalued

The market as a whole looked pricey, but communications services remained a cheap spot.

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This is the market fair value update for Monday, Jan. 1. The market fair value shows how big of a gap, on average, we see between market prices and our estimate of intrinsic value across the entire market or a specific sector.

The current ratio for all rated stocks is 1.06. This indicates that the market is slightly overvalued. That compares to a 52-week high of 1.07 seen on Dec. 27 and a 52-week low of 0.97 reached on Aug. 24.

Valuations across sectors are quite uneven. The most overvalued sector is basic materials at 1.25--that's 25% above our estimate of intrinsic value. We believe basic materials valuations are being propped up by Chinese stimulus and expect a structural change in demand growth from China as its economy matures and transitions toward less commodity-intensive and more consumption-driven growth.

The most undervalued sector is still communications services at 0.84--that's 16% below our estimate of intrinsic value. Some of our top picks in the communications services sector include Comcast, BT Group, and KDDI Corp.

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