AI-related stocks surged in Q2 driving market up, now at overvalued territory

From Morningstar: 2024-07-01 06:48:00

As of June 24, the Morningstar US Market Index has risen 3.20% quarter to date and 13.77% year to date. The surge in the second quarter was driven by gains in AI-related stocks. The market is currently trading at a 3% premium to fair value, nearing overvaluation territory.

AI-related stocks have outperformed growth and core stocks significantly in the second quarter. However, these stocks are now at a 6-7% premium to fair value, while value stocks remain undervalued at a 9% discount. Morningstar recommends moving to an underweight position in core stocks and an overweight position in value stocks.

The current market valuation is largely driven by a few thematic mega-cap stocks such as Nvidia, Meta Platforms, and Apple. Excluding these stocks from valuation calculations reduces the premium to 1%. Morningstar suggests investors may find better opportunities in undervalued value stocks and small-cap stocks rather than overvalued AI-related stocks.

The broad market, including growth stocks tied to AI, has shifted from being undervalued to fully valued or overvalued. Morningstar recommends looking into undervalued sectors and stocks, particularly in real estate, energy, and basic materials. Real estate offers defensive REITs, energy provides a hedge against geopolitical risks, and basic materials show value in gold miners and crop chemical producers.

Technology stocks have reached a 10% premium to fair value due to the AI surge. Morningstar categorizes technology stocks into AI and cloud, traditional technology, and legacy technology. While AI and cloud have strong growth potential, traditional and legacy technology may be overvalued. Consider diversifying into undervalued sectors for better investment opportunities.



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