Last week, stock prices skyrocketed. Morningstar US Market Index It rose by 3.1%. Quarterly earnings season got off to a strong start, while benign inflation data eased economic concerns. In contrast to last year’s dominant trend, the market was led higher by traditionally cyclical companies. basic materials (6.3% increase) energy (6.3% increase) financial services (6.4% increase) communication service (1.4% increase) health care (up 0.4%) Stocks are lagging. small business (up 4.6%) big (2.7% increase) value (up 4.2%) growth (up 0.7%).
Good results from banks
The sharp rise in the prices of financial services companies reflects surprisingly strong performance for the sector, which traditionally heads the earnings season. Index heavyweights such as JPMorgan JPM, Bank of America BAC, Well Fargo WFC and Goldman Sachs GS all posted better-than-expected profits, leading to 2024 profit growth for large U.S. companies, according to FactSet. (upped its rate forecast from 11.9% to 12.5%). Despite these results, financial services The stock currently appears overvalued by about 14%, indicating that future returns are likely to be lower than average.
Energy stocks lag
in contrast, energy Companies have experienced the most significant downward revisions to earnings estimates since the end of last year, with 2024 earnings expected to decline the sharpest of any sector (according to FactSet). However, these companies also benefited from widespread positive sentiment among investors last week, and are now slightly discounting analysts’ estimates for their fair values, which have risen rapidly since the beginning of the year. The price is. You can use this to track your evolving earnings season calendar Read Morningstar’s take on the results once they’re released. here.
Small stocks are undervalued
Although we have seen a reversal in market leadership since the beginning of the year, the valuation disparity remains wide, as shown by the relative prices to fair value of the nine components of the Morningstar Style Box. Small-cap value stocks are undervalued by 11.4%. , while large-cap growth stocks are overvalued by 16.4%. Therefore, there remains a significant opportunity for investors willing to adopt a valuation-driven approach to improve the expected returns of their portfolios.
Patience is required by those pursuing this strategy, as short-term market trends are unpredictable and can persist for long periods of time even after appearing irrational. As shown in Morningstar’s annual Mind the Gap survey, most investors lack that kind of patience and are therefore unable to access these returns. Therefore, before going down this path, it is important to consider whether you have this patience. For those struggling with patience, Morningstar behavioral scientists Ryan Murphy and Samantha Lamas have some tips. article Since last summer.
How investors navigate politics
There has been little economic news of note in a week shortened to commemorate Martin Luther King Jr.’s birthday, and investors’ attention is likely to be more on Washington than on Wall Street. Among the topics investors will be concerned about when President Trump enters the White House, the impact of proposed tariffs is likely to be at the top of the list. One of the challenges in analyzing the economic impact of political decisions is that commentators and investors often align with one side of the debate. This can lead to overconfident forecasts.
But the future is uncertain, so our expectations should reflect a variety of potential outcomes. Preston Caldwell, senior U.S. economist at Morningstar, addressed this as follows: Probability-weighted evaluation of proposed rates. Preston said President Trump’s plan to impose a 10% tariff on all U.S. imports is unlikely, and the economic damage would be far greater than feared by those who believe it would be fully implemented. This suggests that there is a small possibility that You can read more about the thinking behind Preston’s ratings here.
Trump new administration guide
More broadly, Morningstar’s policy research team writes: An Investor’s Guide to the Incoming Trump Administration It covers five areas that investors need to consider, including cryptocurrencies, ESG, and private markets.
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