by - Thanks to promising economic data, markets are trading near record highs.
- However, according to Morningstar, US stocks are slightly overvalued.
- Here are 33 of the company’s favorite stocks heading into a crucial fourth quarter.
US stocks are rising thanks to positive economic data and major interest rate cuts.
The S&P 500 flirted with all-time highs on Friday after a strong labor market report, even as risks such as geopolitical tensions and election uncertainty hang over the market.
However, according to Morningstar, reasonably valued investments are currently difficult to come by.
Top executives at the leading equity research firm found that U.S. stocks were 3% overvalued heading into the fourth quarter. While that doesn’t sound like an unhealthy expansion, the market has been this expensive only 15% of the time since the end of 2010, Dave Sekera, Morningstar’s chief U.S. market strategist, wrote in a recent report.
Morning star
Stocks earned that premium after economic growth exceeded expectations and inflation fell. The most aggressive rate hikes in four decades were no match for U.S. GDP growth, which has held up admirably over the past two years thanks to factors such as excessive consumer savings and government spending, the note said. Inflation falling from multi-decade highs was also a crucial tailwind.
Morning star
“The combination of an economy that has held up better than expected, moderating inflation, falling interest rates and loosening monetary policy has led to stronger equity market returns than we expected at the start of the year,” Sekera and his colleagues wrote .
Morning star
In addition, US stocks were helped by a surge in spending on artificial intelligence. The excitement about that burgeoning technology drove growth-oriented companies to record highs.
It’s no surprise that these growth stocks are responsible for the market’s high valuation. The group is trading 13% above Morningstar’s fair value estimate, compared with a 2% premium for core stocks and a 3% discount for value names.
Similarly, according to Morningstar, large caps are 4% more expensive than they should be, while mid caps are close to fair value, while small caps are unusually cheap at a 15% discount.
Morningstar had upgraded its fair value estimates as the AI-powered rally continued and consumer spending remained solid, but the stock still exceeded those targets.
Attractively priced shares are scarce, but Sekera is confident there are still deals available.
“While the overall market appears to be perfectly priced, we continue to see undervalued opportunities, albeit far fewer and further than earlier this year,” Sekera wrote.
Morning star
33 top stocks to own
In Morningstar’s fourth quarter notes, the company identified 33 stocks as top picks in sectors and groups such as cyclical, defensive and economically sensitive companies.
Naturally, some parts of the market are much cheaper than others. According to Morningstar’s methodology, only communications services and the energy sector are cheap, while defensive consumer products (better known as commodities) and utilities are overpriced.
Morning star
Still, investors can succeed by switching to the stocks Morningstar spotlighted.
“To outperform, we think investors will need to look for contrarian investments and story stocks,” Sekera wrote.
Below are Morningstar’s 33 top picks entering the fourth quarter, listed alphabetically by sector within their broader groups, which are also listed alphabetically. Each company lists its ticker, market cap, group, sector, rating, price target, price appreciation against that target, and selected Morningstar commentary.