Our Outlook for the Market

With 100 equity analysts covering 130 industries, Morningstar has an opinion on just about every corner of the market. As Premium Members know, our coverage list has expanded to more than 1,900 stocks from less than 500 over the past five years. With that expanded coverage, we've become increasingly able to use our bottom-up analysis of individual stocks to draw conclusions about specific industries, broad sectors, and even the market as a whole. You can see this clearly in our market-valuation graph, as well as the two new portfolios in our monthly ETFInvestor newsletter--portfolios that use our stock research to help pick ETFs. 

The Market
So, where do we stand heading into the second quarter? The median stock in our coverage universe is about 4% overvalued, in our opinion. Not too hot. Not too cold. For some historical perspective, the highest the median stock has ever gotten was 14% overvalued, back in December 2004. The lowest: 22% undervalued in October 2002. At current levels, we'd expect the typical stock to offer positive--but single-digit--returns to long-term investors.

Valuations look slightly more attractive on a market-cap-weighted basis. This is important for those of you who invest in index funds or ETFs, most of which divvy up their assets based on the size of the company. The table below breaks down our coverage universe by sector, showing the average star rating in two ways: a simple equal-weighted average that treats all stocks the same, and a market-cap-weighted average. The fact that the averages tend to be higher based on market-cap weightings tells you something: We think larger companies are more attractively priced than smaller companies.

Sector Valuations
	Average Star Rating	Avg Star Rating Market-Cap Wtd
Business Services	2.92	2.84
Consumer Goods	2.89	3.11
Consumer Services	2.98	3.45
Energy	3.01	3.33
Financial Services	2.83	3.14
Hardware	2.84	3.08
Health Care	2.78	3.48
Industrial Materials	2.60	2.77
Media	2.81	3.25
Software	2.89	4.06
Telecommunications	2.76	2.86
Utilities	2.82	2.66
Data as of 03-15-07.

Let's Talk Stocks
Underneath these averages is where it gets really interesting. To let you know our latest thinking on the stocks within each of these broad sectors, we've compiled the series of articles you see below. Sector by sector, we dig into the major themes and also highlight the specific stocks we think are best positioned and most attractively priced.

Business Services: Strong market share and asset-light models spell opportunities.

Consumer: With all eyes on housing, we focus on our outlook and valuations for homebuilders.

Energy: We see opportunities in North American natural gas and coal.

Financial Services: A panic in subprime may have created an opportunity for long-term investors.

Hardware: Downturns in the cyclical chip industry have historically offered the most opportune times to purchase stocks.

Health Care: We see some compelling values in pharmaceuticals and medical devices.

Industrials: Even after the market's tumble, industrials are generally overvalued, but some individual names are worth a look.

Media: Newspapers struggle, but online ad revenue is a bright spot.

Software: Software investors don't need to look for the next big thing to find opportunities.

Telecom: We showcase the stocks we think will benefit from ongoing M&A activity.

Utilities: We believe some subsectors are still attractive and sport below-average risk profiles.