You Can’t Predict Stock Market Performance, but You Can Measure a Stock’s Value

On the March 16 episode of The Morning Filter_, _David Sekeraand Susan Dziubinski discuss a viewer question about Morningstar’s stock valuations and whether Morningstar prices the expectations of market downturns into their ratings. Here is an excerpt from the show.

Do Morningstar Stock Valuations Price in Potential Market Downturns?

Susan Dziubinski: This week’s question comes to us from Isaac, and Isaac asks, “When Morningstar completes its stock valuations, is it taking into account the potential for an overall market downturn? In other words, Is the fact that many of the AI and chip stocks are now trading at 4 stars a sign that Morningstar doesn’t believe that the downturn in that sector is imminent?”

**David Sekera: **I’d say first of all, just generally, we’re not trying to forecast or trying to game the market here in the short-term. We’re really looking at it from that long-term investing viewpoint, not trying to trade any of the quick ups or downs in the marketplace. And if you look at the market valuations overall, I think we take a different view in how to do market valuation than what you hear from a lot of other strategists. We do really a bottom-up analysis as opposed to a top-down estimate. So again, over the course of my career, I always found most market strategists have some model, some sort of algorithm, some way that they come up with an estimate for what they think S&P 500 earnings are going to be over the course of a full year. They then apply some sort of forward multiple to that. They always have reasoning for it, but it always seems like they are telling you the market’s 8% to 10% undervalued. Rarely do you get too many strategists out there saying that the market’s overvalued. When the markets are falling, they like to bring their valuations down as well. So to me, I think a lot of other strategists, what they do really ends up being more goal-seeking than it is necessarily a true market valuation.

Now on our individual stocks, we will move our valuations there based on changes in forecasts to those individual companies. Of course that’s impacted by just the general economic outlook, but really more specifically industry-specific conditions, as well as what we see specifically going on with that individual company. Over time, I find that markets often act like a pendulum. We find that, both at the market level and even individual stock level, markets oftentimes just swing too far in one direction and then they end up swinging back too far in the other direction. And that’s when, I think, you can use that market valuation that we provide to be able to look for those opportunities to be able to overweight and underweight compared to your targeted allocations overall.

So one of the things I’d recommend looking at is like every month or every quarter when we put out our market updates or outlooks, take a look at the historical price/fair value chart. And that goes all the way back to the beginning of 2011 and look for those instances where you see those really big swings. So, for example, 2012, the market sold off, in our view, way too much to the downside. That was, of course, back when we had the European sovereign debt and banking crisis. So the market price to fair value, that’s the composite of all of those individual stocks that we cover as compared to the market, bottomed out at 0.77, meaning that the market was trading at a 23% discount to fair value.

But then what happened? The market rallied too far to the upside and then ended up selling off at the end of 2019 after getting too high of evaluation in 2018 and the beginning of 2019. And then we’ve had another rally too far to the upside once again, after the market bottomed out in 2019. In fact, in early 2022, I think we might have been one of the only shops out there recommending to underweight the stock market overall. We noted it was a combination of multiple different factors. The most important was that the market was just too overvalued at that point in time. We were expecting inflation to increase. We were looking for the Fed to tighten monetary policy. We were looking for interest rates to go up. And then the market sold off. By mid-2022, we changed our recommendation to market-weight. And then by fall of 2022 is another one of those instances where we moved to overweight because the market had fallen too much as compared to those long-term intrinsic valuations. Market then bottomed out in October of 2022, and we’ve had a very strong recovery ever since.

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High Valuations, Higher Stakes: We’re Expecting Volatile Markets in 2026

Join Morningstar’s chief US market strategist and chief US economist for their 2026 market outlook as they review Morningstar’s current market valuation and why they expect the economy to reaccelerate in the second half of 2026.

Subscribe to The Morning Filter on Apple Podcasts, or wherever you get your podcasts, and keep up with the latest research from hosts Susan Dziubinski and David Sekera on Morningstar.com.

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			45m 26s
		 Mar 16, 2026

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