Markets Brief: After the Selloff, Stocks Are Still Not Cheap

High Growth Stocks Still Overpriced

The Morningstar US Market Index ended a turbulent week up 5.5%, but it’s still down in April. The technology and communications services sectors fared best, rising 8.9% and 6.4%, respectively, while more traditional industries lagged. However, few investors celebrated these gains in an environment where foundational economic policies are changing daily. Preston Caldwell goes deeper into the tariffs that drove the week’s volatility.

Despite investor nervousness, US equities are not especially cheap, either in absolute terms or relative to other markets. While some opportunities have undoubtedly emerged over the last few weeks, the market as a whole is priced a little below Morningstar’s estimate of the median fair value, while large-growth companies remain significantly overpriced, reflecting the high starting prices those companies had going into the year.

Since investor trepidation is not yet fully reflected in low prices, it seems a little early to significantly increase one’s portfolio risk in the hope of higher returns. Cultivating genuine diversification in a portfolio while avoiding knee-jerk short-term decisions appears to be a better course. During these periods, it is more important than usual to focus on your longer-term goals rather than market movements. Behavioral scientist Samantha Lamas has tips on this.

Dollar, Treasuries, and Inflation

While equity markets tend to draw media attention, the uncertainty investors face is best illustrated by the price movement in the US dollar, which sank to its lowest level against the euro in three years, and US government bonds, which fell 2.3% as the 10-year Treasury yield rose to 4.5%. These assets are traditionally seen as safe havens during market turmoil, and their decline amid such volatility suggests the uncertainty in US policymaking is impacting the United States’ position as the bedrock of the global financial system.

Although it is too early to conclude that the US’ role is degrading, investors will likely have lower appetite for risk in this environment. The rapid change in the economic outlook and sentiment was illustrated last week by the reaction to inflation data. While core CPI came in below forecasts, long-term expectations for inflation spiked, consumer sentiment weakened, and the probability of imminent interest-rate cuts fell.

JPMorgan Kicks Off Q1 Earnings Season

Against this backdrop, weak company earnings may elicit more responses than usual. A good example was provided by JPMorgan Chase JPM. Though the bank beat its earnings expectations for the first quarter by 10%, the stock underperformed the US market by 1.5% on Friday, as management highlighted the potential for “considerable turbulence” in the new quarter due to tariffs.

This focus on the outlook rather than realized results is especially relevant as we enter the second big week of earnings season. There are also several measures of economic activity due for release this week, including reports on retail sales, industrial production, and capacity utilization. You can keep track of these all these announcements with our calendar.