What's the Market Really Worth?

One way to get a read on the general attractiveness of stocks is to examine the valuations of major market indexes. To do so, we can tap into the work of Morningstar's 100-plus equity analysts.

With more than 2,000 stocks under coverage, our research spans much of the market. We cover all of the stocks included in the Dow Jones Industrial Average, and almost 98% of the assets in the S&P 500 Index. Thus, we can compute meaningful aggregate fair values of those familiar market barometers. Then we can compare the indexes' aggregate fair values with their current market values to gauge whether or not the market, as defined by those benchmarks, is cheap or dear.

The Dow's discount to fair value is about where it was at the close of the second quarter when we last visited this topic. But the S&P 500 looks cheaper than it did three months ago. Still, the market can't be considered dramatically undervalued. Third-quarter volatility did bring a few more bargains to light, but value-priced stocks aren't plentiful across the board.

Market Index Valuations
	Index Value	Fair Value Estimate	% Under- or Overvalued
Dow Jones Ind. Average	14,066.01	14,963.84	-6.4%
S&P 500	1,557.59	1,622.49	-4.2%
Data as of 10-05-07

A look at the most attractive Dow stocks gives some clues as to where the most compelling bargains can be found. Here's a list of the Dow components that have earned 4- and 5-star ratings.

Dow Components with Recent 4- or 5-Star Morningstar Ratings
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