From Morningstar: 2024-04-11 05:10:00

The US equity market is currently trading at a 3% premium to fair value, suggesting potential overvaluation. Contrarian investments, specifically in undervalued sectors like value and small caps, might offer better safety margins for investors. Morningstar analysts expect further rises to be driven by higher yields in undervalued categories like telecommunications and consumer cyclicals. US Stock Market: Overvalued?

In early 2023, the US equity market continued its rally with the Morningstar US Market Index up 8.73% in USD. Most gains were concentrated in AI-related stocks like Nvidia, leading to overvaluation in growth stocks and undervaluation in the value segment. Morningstar suggests overweighting value and blend stocks in portfolios. Fed Up, Fed Down: The Case For Value and Small Caps

Real estate, utilities, and energy are sectors with significant contrarian opportunities due to negative sentiment and trading at a discount. Investors can find undervalued stocks in defensive sectors like healthcare providers, triple-net leases, and companies like Ventas and Realty Income. Utilities, like NiSource and Entergy, are also underrated compared to their fundamentals. Spotlight on: Real Estate & Utilities

The industrial goods sector, transportation, airlines, and technology stocks are among the most overvalued sectors. Companies like XPO, Southwest Airlines, ARM Holdings, and Dell Technologies are trading at premiums to fair value, while defensive consumer goods companies like Walmart and Costco are overvalued. US banks and certain food producers are trading at attractive prices. Which Sectors Are Overvalued?

The Fed is expected to cut US interest rates with a soft landing for the economy and a slowdown in growth forecasted by Morningstar analysts. Lower interest rates are positive for all stocks, particularly in the value index. Historically, small caps perform well during interest rate cuts, making contrarian investments in this segment attractive. When Will The Fed Cut US Interest Rates?



Read more at Morningstar: US Equities in Q2: Why Contrarian Picks Are Better