US Stock Market Trading at a Premium to Our Fair Value
As of March 22, the US stock market is trading at a 3% premium over a composite of our fair values. While this premium does not put the market in overvalued territory, since the end of 2010, the market has traded at this much of a premium, or more, only 14% of the time.
In the future, we expect further gains will be driven by a widening out of returns across the market, specifically into the value category, which remains the most undervalued according to our valuations, as well as down in capitalization into small-cap stocks.
In our view, it is unlikely that what has worked for the last year and a half, will be what continues to work. At the market bottom in October 2022, communications, consumer cyclicals, and technology were the three most undervalued sectors. One and a half years later, technology is now overvalued, and both communications and consumer cyclicals are nearing fair value. We think now is a good time for investors to look for contrarian investment opportunities, especially in those areas that have underperformed, are unloved—and most importantly—undervalued.