US Stocks Trading at Slight Premium, Undervalued Value Stocks Present Opportunities

US stocks are trading at a slight premium to fair value, with growth stocks at a high premium and small-cap stocks attractively valued but slow to perform. Market swings provide opportunities, with a focus on long-term investing. Value stocks are undervalued, with small caps historically performing best when the Fed eases monetary policy.

The US equity market is trading at a 1% premium over fair value, with volatility expected to return due to tariff negotiations and earnings season. Positioning is crucial, with an overweight in value stocks and an underweight in growth stocks recommended. Small-cap stocks offer value while large-cap stocks are at a premium.

Sector valuations are rising, with healthcare and energy undervalued. Healthcare stocks face uncertainty but offer value, particularly in medical devices. Energy stocks fell with oil prices but are fundamentally undervalued. Communications and real estate sectors are undervalued, with opportunities in traditional media and healthcare real estate. Financials and consumer defensive sectors are overvalued, while utilities and industrials offer caution due to economic growth slowing.

Technology sector is overvalued but presents investment opportunities, especially in generative AI, cloud computing, and semiconductor demand. Investors are advised to rebalance their portfolios, taking profits from overvalued sectors and reinvesting in undervalued areas. Join the Q3 2025 Market Outlook Webinar for a deeper dive into market returns, valuations, and outlook.

Read more at Morningstar: After the Rally, What’s Still Undervalued?