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Quarter-End Insights

Stock Market Outlook: Left-Behind Communication Services Sector Offers the Most Value Today

Tech and healthcare look expensive.

  • The Morningstar Global Markets Index has risen 4.5% year to date.
  • Weighted by market capitalization, our coverage universe looks slightly overvalued.
  • Communication services looks cheap, while tech and healthcare are pricey.

Following a flattish first half, global equities enjoyed a fairly strong third quarter, with the Morningstar Global Markets Index now up 4.5% year to date. In aggregate, our equity coverage of roughly 1,500 stocks, now looks slightly overvalued, trading at a 4.5% premium to fair value on a capitalization-weighted basis. 

Scanning for opportunities at the sector level, communication services appears the cheapest, trading at a 13% discount to our fair value on a cap-weighted basis as of Aug. 31. While the sector had a solid third quarter, rising 5.2%, it remains down for the year and has been generally left behind in the global bull market. Our top picks across our global coverage include European telecoms  Telefonica (TEF) and  BT Group and U.S.-based  Comcast (CMCSA).

Technology and healthcare, which have enjoyed very strong performance in 2018 (global indexes are up 12.1% and 13.1%, respectively) now rank among the most expensive sectors based on our fundamental research, trading at 8.0% and 6.4% premiums to fair value, respectively. Still, we continue to see pockets of value in each. For example, we see considerable upside in leading semiconductor names  Intel (INTC) and  Broadcom (AVGO).

Our takes on the biggest themes and best opportunities in each sector can be found in the following reports:
Healthcare: Valuations Improve as Concerns Over Drug Pricing Pressures Begin to Abate

Utilities: Running in Place, but Hurdles Ahead

Basic Materials: Metals and Mining Firms Substantially Overvalued

Energy: Oil Prices Remain Unsustainably High, With U.S. Shale Growth Still Looming

Real Estate: Fundamentals Still Show Solid Growth

Financial Services:  Investment Services Competition Is Heating Up

Communication Services: The Race to 5G Wireless Is On, at Least for Some

Consumer Cyclical: Solid Economic Fundamentals Drive Discretionary Spending

Consumer Defensive: Thirst for Growth has Yet to be Quenched

Industrials: Labor Shortages Driving Innovation

Technology: Sector Appears Overvalued Despite Birth of First Trillion-Dollar-Market-Cap Stock in Apple

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