Markets are trading near all-time highs thanks to encouraging economic indicators. However, U.S. stocks are slightly overvalued, according to Morningstar. Here are 33 of our favorite stocks from the company heading into the crucial fourth quarter.
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U.S. stocks are soaring on the back of good economic indicators and significant interest rate cuts.
The S&P 500 rose to new highs Friday on a strong labor market report, despite risks such as geopolitical tensions and election uncertainty looming over the market.
But investments with significant value are hard to come by right now, according to Morningstar.
Executives at a major equity research firm found that U.S. stocks were overvalued by 3% heading into the fourth quarter. That doesn’t sound like an unhealthy stretch, but the market has only gotten that expensive 15% of the time since late 2010, said Dave Sekera, chief U.S. market strategist at Morningstar, in a recent study. stated in the report.
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Stocks earned that premium as inflation fell and economic growth exceeded expectations. The memo said the most aggressive rate hikes in four decades fell short of U.S. GDP growth, which has held up admirably over the past two years due to factors such as consumer excess savings and government spending. Inflation, which has fallen from multi-decade highs, also provided a crucial tailwind.
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“The combination of an economy that has held up better than expected, easing inflation, lower interest rates, and easing monetary policy has resulted in stronger stock market returns than we expected at the beginning of the year,” Sekera and colleagues wrote.
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Additionally, US stocks were also supported by a surge in spending on artificial intelligence. Its enthusiasm for fast-growing technology has propelled growth-oriented companies to record profits.
So it’s no surprise that these growth stocks are responsible for their high market valuations. The group trades 13% above Morningstar’s fair value estimate, compared with a 2% premium for core stocks and a 3% discount for value stocks.
Similarly, in Morningstar’s view, large-cap stocks are 4% more expensive than they should be, mid-cap stocks are close to fair value, and small-cap stocks are unusually cheap at a 15% discount.
Morningstar had revised its fair value estimate upwards due to the intensification of AI-powered stock prices and continued strong consumer spending, but the stock remained above its target.
Although there are few stocks at attractive prices, Sekera is confident the deal still exists.
“While the overall market appears to be perfectly priced, there continue to be undervalued opportunities, albeit far fewer and more distant than earlier this year,” Sekera wrote.
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Top 33 stocks to own
In Morningstar’s fourth quarter report, the firm designated 33 stocks as top priorities across sectors and groups, including cyclical, defensive and cyclical stocks.
Naturally, some areas of the market are much cheaper than others. According to Morningstar’s methodology, only telecommunications services and energy sectors are cheap, while consumer defense products and utilities, known as essentials, are too expensive.
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Still, investors can do well by shifting to Morningstar-focused stocks.
“To outperform, we believe investors need to look for contrarian investments and story stocks,” Sekera wrote.
Below are Morningstar’s 33 top picks for the fourth quarter, arranged alphabetically by sector within the broader group. These are also in alphabetical order. In addition to each company, we also include ticker, market cap, group, sector, rating, price target, upside potential to target price, and selected commentary from Morningstar.
