Market Outlook: Lofty Valuations Call for Careful Stock-Picking

• The Morningstar Global Markets Index has returned more than 6% year to date and 16% over the past year.
• The market-cap-weighted price/fair value estimate ratio for our equity analysts' coverage universe is 1.06.
• Healthcare is the most undervalued sector, with a price/fair value estimate ratio of 0.98. Basic materials is the most overvalued sector, with a price/fair value estimate ratio of 1.44.

Healthcare is top of mind as one of our most undervalued sectors--if only on a relative basis--and the one facing the most immediate possible changes under the Trump administration and Republican-controlled Congress in the United States. Both are looking to fulfill the long-standing promise of repealing the Affordable Care Act.

The road to repeal is rough, as the proposed reform ideas could lead to eliminating coverage for millions of Americans, and Republicans hold only a narrow majority in the Senate. The House vote on the American Health Care Act scheduled for Friday, March 24, was called off for lack of support, making the ultimate outcome even more uncertain, given opposition from both very conservative and moderate members within the Republican party. Most Republican proposals would lead to fewer insured Americans, weaker coverage, and higher out-of-pocket costs. Our analysts view the drug industry as best positioned for potential changes, with

Consumer cyclical is another sector where we see a decent amount of value in a generally overvalued market. Consumer confidence has remained high since the U.S. presidential election, but as consumers become increasingly comfortable making purchases online, companies relying on foot traffic in brick-and-mortar locations have continued to come under pressure.

Still, we think companies such as

On the other side of the valuation spectrum, metals and mining stocks look especially expensive. Commodity prices have rallied since early 2016 thanks to China's stimulus, but mines previously shut down are now coming back on line, and greater production has already started from high-cost producers of bulk commodities.

We view both the stimulus and the production curtailments as unsustainable, and see significant downside risk in stock prices. China optimism is also unduly propping up U.S. steel producer valuations, in our view, and these stocks are also baking in expectations for a material increase in infrastructure spending that could prove hard to deliver in reality.

More Quarter-End Insights

Video Report: Few Values Left in the Global Stock Market

Economic Outlook: First-Quarter Underscores Slow Growth Expectations

Credit Market Insights: Bond Indexes Perform Well as Spreads Tighten Further

Basic Materials: The Most Expensive Sector We Cover

Consumer Cyclical: Still Opportunity in a High-Confidence Environment

Consumer Defensive: Still Thirsty for Growth

Energy: Coming Shale Growth a Major Threat to Oil Prices

Financial Services: Weighing the Strategic Tradeoffs of the Fiduciary Rule

Healthcare: Stock-Picking Increasingly Important as Valuations Rise

Industrials: Solid Fundamentals, but Few Screaming Buys

REITs: Playing Defense in an Uncertain Market

Tech: Overvalued Overall, but Opportunities Remain

Telecom: Firms Strive to Be More Than 'Dumb Pipes'

Utilities: Is There Enough Growth to Offset Higher Interest Rates?