Are US Stocks Priced for Perfection?

On this episode of The Long View, Dave Sekera, chief US market strategist for Morningstar Research Services, breaks down key takeaways from his most recent market outlook, 2025 Market Outlook: Markets Are Priced to Perfection, but Will It Last?

Here are a few highlights from Sekera’s conversation with Morningstar’s Christine Benz and Dan Lefkovitz.

Are US Stocks Expensive?

Christine Benz: You published in December a 2025 US stock market outlook, and one key takeaway from that very helpful overview is that US stocks are expensive, which you have previously referenced. In fact, you wrote that they’re priced for perfection. So, I’m curious, is all of the US expensive or just the US large-growth stocks and in turn the total market indexes that lean so heavily on them today?

Dave Sekera: This is one of those cases where it does become very helpful to break down the broad market into a lot of its different components. Right now, when we look at the valuations across the market, the market is trading at a bit of a premium, and that premium has been increasing over the past couple of months, getting to the point where it is starting to look pretty fully, if not overvalued, at this point. But then when we break it down, we see value stocks are still trading pretty close to fair value. And that would be one of those areas that you might want to overweight in your portfolio. And then when you look at core stocks, they’re trading more in line with that broad market premium. But growth stocks as a category are significantly overvalued right now.

When I look at where growth stocks are trading on a composite basis, the last time we saw them trade at this much of a premium or more was back in late 2020, early 2021. If you remember back at that point, we had what we called the “disruptive technology bubble”—a lot of those technology stocks rose way too far, way too fast. Of course, that bubble then popped, and growth stocks came down in 2022, much harder than what we saw across the rest of the market. So again, depending on your risk tolerance and how your portfolio is set up, now might be a good time to maybe take some profit in that growth area and redeploy in other areas that are, if not undervalued, at least closer to fair value.

I’d note that large-cap stocks today are very overpriced compared with where they typically trade. I think the last time large-cap stocks were at the kind of premiums that we’re seeing right now was back in early 2018. And of course, if you remember the second half of 2018, we did have a pretty good market selloff. I think it bottomed out on Christmas Eve in 2018. We had the China global growth scare and a couple of other things that occurred. Another area where we see a lot of value is small-cap stocks. Now we did start to see kind of that rotation out of large- and mid-cap a couple of months ago. But when we look at our valuations both on an absolute as well as a relative value basis, we still think that probably still has further room to run over next year.

Overvaluation in the Market

Dan Lefkovitz: At the market level, you’re seeing overvaluation. Can you talk a little bit about the historical ebbs and flows of that market-level valuation indicator?

Sekera: I usually go back to 2010 and look at that broad market price/fair value indicator. Based on where valuations are today, I think it’s less than 10% of the time going back to 2010 that the market traded at this much of a premium or more. Now, usually, when it does trade at that premium, the market, even if it’s overvalued, can either stay overvalued or become even more overvalued before something causes it to change. When I look at the macro dynamics of the markets today, I think there are enough tailwinds that are still out there that could keep stocks, at these relatively elevated valuations until earnings catch up. So I think as the economy reaccelerates in the second half of next year, we could see earnings catch up to where valuations are. I’m not necessarily expecting to see a market correction today, unlike back in 2022.

So, our 2022 outlook was clearly the opposite of what we had today. At that point, we were looking for inflation really to start heating up, for interest rates to go up, for the Fed to start tightening monetary policy, and for the economy to weaken pretty significantly. Of course, all of that occurred, and the market sold off quite a bit. In fact, it got down to some of the lowest valuation levels, by October that we had seen going all the way back to 2010 as well. So when I think about that price/fair value metric at the broad market level, it’s not necessarily a timing indicator, because again, stocks, even if they look undervalued, you can always get more undervalued to the downside. Maybe as stocks are going down, you want to get a larger and larger percentage of your portfolio into those stocks as they’re selling off.

And then conversely, once it moves back up to fair value, that’s a good time to take some of that profit off the table. And again, in an environment like today, maybe now is a good time to revisit your portfolio. Maybe you got a little overextended in the stock allocation part of your portfolio. And there’s the old adage on the Street: No one ever went broke taking a profit. So, depending on what your portfolio looks like today, maybe it is a good time to take a little bit of money off the table in the equity market.

Risk Among Large-Cap Growth Stocks for Investors

Benz: I had previously referenced the broad market indexes that it seems like when we look at fund flows, investors and advisors seem to really be gravitating toward the total stock market indexes. Given that some of those large-cap growth stocks—tech names in particular—are at the top of those indexes, would you say investors who are looking to those sorts of products to supply all of their US equity exposure are courting some significant risk today?

Sekera: Well, I think the biggest risk there is going to be concentration risk. Last time I checked attribution analysis, well over half of the market return thus far this year has been driven by just 10 stocks. And of those 10 stocks, I believe they’re all large mega-cap stocks. So, bigger than what you even consider to be a large-cap stock. And of course, most of those are also all leveraged to artificial intelligence and the AI theme thus far this year. So, when I’m looking at those 10 stocks and comparing them to where our fair values are, I’d say most of these stocks are either at fair value or even starting to get to be more overvalued, some of them now starting to get into 2-star range. So again, when you buy that broad market index, you are going to be naturally overweighting those mega-cap stocks that have run up as far as they have thus far this year.

Eli Lilly LLY is a name where, yes, there’s a tremendous amount of growth there in the short term. And there’s going to be a tremendous amount of growth for the next couple of years. Karen Andersen, who covers that stock, really digs into the competitive landscape there. She noted that 16 potential products could get launched and have FDA approval by 2029. And so I think the market is overvaluing the stock because they’re pricing too much growth too far into the future. And that would be one of those that we’d be very concerned about when and if the market realizes that and starts seeing potentially the growth slowing down in the future, that stock potentially has a lot of downside risk. And of course, as much as it’s risen thus far this year and has become a larger and larger percentage of an index, then could skew that index to the downside.