Are US Stocks Overpriced Again?

On the latest episode of the Investor First live webinar series, Morningstar’s CEO, Kunal Kapoor, sat down with Philip Straehl, chief investment officer of the Americas, for Morningstar Investment Management, Preston Caldwell, senior US economist at Morningstar, and Toby Moerschen, managing director, Private Corporate Credit, Morningstar DBRS, to discuss their outlook for the second half of 2025, and answer investor questions as they try to make sense of the ongoing market volatility, economic uncertainty, and how they can evaluate risk going forward. The conversation took place on July 23, 2025.

Here are a few excerpts from Kapoor’s conversation with Straehl.

Kapoor: Philip, here at Morningstar, we try to assign fair values to individual companies, and then we roll those up to look at markets. And so, if we were to roll up our fair values here in the US and tie it back to your comments around maybe the US being less attractive than international markets, can you help investors think about how to look at the US market through the lens of our fair values today?

Straehl: Sure. If we do that sort of bottom-up analysis, as of midyear, the US market traded at about a 2% premium to its intrinsic value. And we do think that the US market, on a bottom-up basis, looks a little bit expensive. And if we contrast that to where we were at the height of the selloff in April, the US market traded at about a 17% discount to the intrinsic value. And so, we kind of came full circle. We were about fairly valued at the beginning of the year, then the market dropped. At some point, the US market was in a bear market, and it dropped 20%. And so, we’ve now kind of recovered and are now looking a little bit expensive on a bottom-up basis.

Kapoor: You’re building portfolios and thinking about it at a granular level, taking all that input. And so, if you’re building portfolios today and imagining what might work best for the future, what would you tell our audience they should be thinking about most if they’re thinking about repositioning their portfolios from this point on?

Straehl: The two I kind of talked a little bit about the biggest opportunities being outside of the market consensus, and the two ones I would mention on the equity side, I’d mentioned international stocks. And I might just show quickly a slide here, that just kind of shows our expectations for the next 10 years in terms of US dollar returns for both emerging markets, international development, and US stocks. And you can see that we expect continued outperformance of non-US stocks, particularly in emerging markets, over the next 10 years. And so, that’s one of the areas we’re leaning into. We think US stocks had a phenomenal run. I mentioned the 13.6 performance over the decade to the end of 2024 earlier, which is really much better, actually, even than the 100-year average that we see in the US, which was stellar to begin with. We see opportunities in non-US stocks.

And the second opportunity I would call out is the opportunity that happens further down the market-cap spectrum. We can see that both when we roll up the same analysis we did earlier, which we commented on, and where we saw that large-cap stocks traded at about a 2% premium to intrinsic value. If you go further down the market-cap spectrum and look at the style box components, we can see that small-cap stocks are actually trading at a discount, and in this analysis, here are poised to outperform the large-cap stocks.

Kapoor: One of our listeners, Theresa, is asking a question that I think you’ve partially answered, in terms of international outshining domestic, and maybe being a good bet looking forward.

But the second half of her question, I think, is pertinent, too, which is, how do you really get comfortable with the idea that this is not a short-term trend? Because it does feel like we’ve been hearing the international versus US, as well as the small-cap versus large-cap argument for a few years now, right? And so, some investors are skeptical that that trend will reverse. And maybe that’s what it takes. But I’m curious, and I think Theresa’s curious, how do you ensure that this is not a short-term thing when you’re building a portfolio?

Straehl: I think, on the international front, we have started seeing some positive momentum on, let’s say, the fiscal stimulus side internationally. In Germany, in particular, more of a stance toward spending more to help promote growth in Germany, for example, or in Europe, in particular. And then the second part of that is the dollar weakness that we’ve seen over the first six months of this year. We think that looking at our long-term currency models, we think that there’s an opportunity for the dollar to continue to weaken over the next years to come. And some of that is just because we have seen now catalysts where non-US investors are starting to think about how much US dollar exposure they might have in the portfolio.

Kapoor: Great. One of the questions, Philip, that’s come in is you’re talking about US equities. And given some of the comments that have been made by Toby and others on bonds, how do you think about the attractiveness of US bonds compared to US stocks? And when you’re building a portfolio, what’s the trade-off today between asset classes?

Straehl: From our perspective, we’re roughly kind of neutral on the stock/bonds split. And one of the reasons why we still think that there’s value to fixed income, despite some of the headlines we’ve seen around higher default risk with the Moody’s ratings, for example, being downgraded, is because yield levels are higher today than they were a few years ago. So, real yields today on the US 10-year are around 2%. If you think about where real yields were going into the 2022 bond market selloff, real yields at the time were negative 1%. So, we think that there’s just more diversification potential still within fixed income.

We’re cautious on credit. Toby mentioned some of the increased defaults in the areas that he’s covering. And so, we do think that both investment-grade and high-yield credit are not particularly attractively valued. So we’re underweight those areas, and we emphasize Treasury bonds in our portfolio today.