Morningstar report – North America Market Outlook: Q4 2023

As of September 25, 2023, the U.S. equity market is trading at an 8% discount to its fair value estimates, according to Morningstar's composite valuation of over 700 stocks. Upward momentum in July briefly brought the market to fair value, but gains were subsequently lost due to hawkish Federal Reserve commentary, rising energy prices, and higher interest rates in August and September. The Morningstar US Market Index dropped 2.26% in the quarter up to September 25, but remains up 13.88% year-to-date. Growth stocks, though still leading in returns, became overvalued, trading at a 4% premium to fair value. They have since pulled back, and Morningstar now recommends a market-weight position in growth. Large-cap stocks fared better in the downturn, dropping only 1.45% in the past quarter and rising 17.53% year-to-date. Mid-cap and small-cap stocks are assessed to be at greater discounts to fair value for long-term investors. The market is expected to face short-term volatility as it adjusts to an anticipated economic slowdown in the fourth quarter, with further gains driven by a broadening out of returns, particularly in the undervalued value category.