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Market Fair Value Update: Basic Materials Is Overvalued

This is the market fair value update for Monday, Jan. 1. The market fair value shows how big of a gap, on average, we see between market prices and our estimate of intrinsic value across the entire market or a specific sector.

The current ratio for all rated stocks is 1.06. This indicates that the market is slightly overvalued. That compares to a 52-week high of 1.07 seen on Dec. 27 and a 52-week low of 0.97 reached on Aug. 24.

Valuations across sectors are quite uneven. The most overvalued sector is basic materials at 1.25--that's 25% above our estimate of intrinsic value. We believe basic materials valuations are being propped up by Chinese stimulus and expect a structural change in demand growth from China as its economy matures and transitions toward less commodity-intensive and more consumption-driven growth.

The most undervalued sector is still communications services at 0.84--that's 16% below our estimate of intrinsic value. Some of our top picks in the communications services sector include Comcast, BT Group, and KDDI Corp.