Jeremy Glaser: U.S. equities remain pricey. The median stock in our coverage universe is now trading for around 3% more than our analysts think it is worth. That's off slightly from the 5% overvaluation seen in March, but still well above historical levels. Across sectors, there's a bit of a spread in valuations but no screaming bargains. Energy stocks, for example, are the cheapest with the median stock, trading at an 8% discount to our fair value estimate. Technology, on the other hand, looks the priciest, trading at a 12% premium.
Although there are a number of factors responsible for stock prices remaining so lofty, one of the ones that's been in focus recently is the possibility of corporate tax reform out of Washington and how that could prove a boost to earnings. Morningstar stock analysts expect that some tax deal will be struck and have already modeled in lower tax rates.
What should investors do then? If your investment plan includes an allocation to U.S. equities, there is no reason to abandon it. But there are a few important things to keep in mind. First, this is a good time to check your asset allocation and potentially rebalance if your exposure to U.S. stocks or equities in general have become out of whack. Second, be prepared for volatility. We already saw one big sell-off when the prospect of reforms became dimmer and although stocks subsequently recovered, it was a reminder that markets aren't always docile. Make sure you have both the risk tolerance and capacity to withstand that.
Finally, it's not a bad idea to have a watch list of stocks or a good value manager to take advantage of opportunities if they do open up.
