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.
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.