33 Cheap Stocks to Buy in Q3: Morningstar

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The U.S. stock market ended the second quarter up more than 3%, as measured by the Morningstar US Market Index. And starting the third quarter, stocks look fairly valued according to Morningstar’s metrics, Susan Dziubinski, the firm’s investment specialist, reported in a new blog post.

Based on a composite of the stocks that Morningstar covers, the U.S. stock market was trading at a price to fair value ratio of 1.03 at the end of the second quarter.

What might this mean for the remainder of 2024?

“Anything related to artificial intelligence continued to surge in the second quarter,” Morningstar’s chief U.S. market strategist, David Sekera, wrote in his third-quarter 2024 stock market outlook.

“While a rising tide can lift overvalued AI stocks even further into overvalued territory in the short term, in the future, we think long-term investors will be better off paring down positions in growth and core stocks, which are becoming overextended, and reinvesting those proceeds into value stocks, which trade at an attractive margin of safety.”

Dziubinski examined stock market valuations through several lenses. By investment style, small-value stocks are currently the most undervalued stocks, trading 28% below Morningstar’s fair value estimate. Large core and large growth stocks, meanwhile, are overvalued.

By sector, consumer defensive, industrials and technology stocks look most overvalued heading into the third quarter. The most undervalued sectors are basic materials, energy and real estate.

By Morningstar economic moat rating, which is a measure of a company’s competitive advantages, wide-moat stocks are overvalued by 6%, while narrow- and no-moat stocks are about fairly valued.

See the accompanying gallery for a glance at how valuations stack up across sectors as of June 28, according to Morningstar.