Our outlook for the U.S. stock market

We think stockpicking--rather than macro guessing--is the way to excess returns.

Lauren Adams, CFA 30 September, 2013 | 6:00PM
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With the S&P 500 up nearly 6% since our last market outlook, our coverage universe has closed the valuation gap from its previous 94% of fair value and now looks slightly on the overvalued side at 102%.
With interest rate prognosticating top of mind in today's market, we continue to think uncovering undervalued, competitively-advantaged businesses--rather than guessing at macro trends--is the best way to earn excess returns over the long run. However, the market doesn't always follow fundamentals, and we wouldn't be surprised to see the market become overvalued before undervalued (especially given the Fed's recent decision to prolong its bond purchases).
Social media names have had a banner quarter, but we think tech valuations overall are now getting ahead of themselves. Energy, basic materials, communication services and utilities sectors are trading at the largest discount to fair value estimates, and we think Europe remains the cheapest region under our coverage.

This month marks the five-year anniversary of the financial market collapse, and U.S. stocks have certainly come a long way since September 2008 (140% off March 2009 lows at the time of this writing, to be precise). With the S&P 500 and the Dow once again eclipsing all-time highs and interest rates staying low for the longest stretch in 50 years, most investors have already seen quite a lot of benefit from the fount of cheap money.

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About Author

Lauren Adams, CFA

Lauren Adams, CFA  Lauren Adams is the Director of Cross-Sector Equity Research at Morningstar.

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