Key Takeaways
- The US stock market is looking moderately cheaper amid an ongoing selloff, trading at a 5% discount.
- Dramatic losses across mega-cap tech and artificial intelligence stocks are driving market-level valuations lower.
- Morningstar strategists recommend underweighting growth stocks and overweighting value and small-cap stocks.
The recent selloff in stocks rattling investors has had one major side effect: The market is looking cheaper after pushing into overvalued territory late last year. As stock prices have fallen in the first months of 2025, so too have equity valuations. The change comes after months of warnings from strategists that the hottest big tech stocks were “priced for perfection,” meaning any misstep in earnings, forward guidance, or headlines could send them plummeting. In general, market watchers saw overly high valuations as a red flag for an unhealthy market (though that’s not always the case when valuations rise).
As of March 14, the Morningstar US Market Index was trading at a 5% discount to Morningstar’s assessment of its fair value, with a price/fair value ratio of 0.95. At the beginning of 2025, the market traded at a 3% premium. Stocks are down 4.5% since then.
Morningstar analysts determine whether stocks are over- or undervalued by comparing their prices with estimates of their intrinsic worth, or fair value. A price/fair value ratio higher than 1 indicates a stock is overvalued, or expensive, while a ratio under 1 indicates it’s undervalued, or cheap. The further the distance from 1, the greater the premium or discount. Market-level and sector-level fair value data is calculated using a weighted average of the valuation of stocks Morningstar analysts cover within an index or sector.
While stocks look much cheaper than they did at the start of the year, valuations haven’t approached levels seen during the 2022 market selloff. In September of that year, for instance, the US Market Index traded at a whopping 21% discount.
Tech Stocks Lead Valuation Reset
Much of this change in the market’s valuation stems from changes for high-flying tech and artificial intelligence stocks, many of which have sold off more dramatically than the broader market over the past few months.
“A lot of these stocks have come down enough that they’re within the range we consider fairly valued,” says Morningstar chief US market strategist Dave Sekera, who says the selloff helped take some steam out of frothy AI valuations. “Some of them have fallen enough that they’re now starting to look more attractive.”
Because AI stocks like Nvidia NVDA, Meta Platforms META, and Amazon AMZN are so large compared with other stocks in the index, they have an outsized impact on market-level and sector-level valuations.
The technology sector, which includes Nvidia and Microsoft MSFT, started 2025 at a 4% premium, and it now trades at an 8% discount. Meanwhile, communication services started 2025 looking cheap, and is now even cheaper. It was trading at a 17% discount as of March 14, compared with an 8% discount at the start of the year. Sekera explains that much of that change is thanks to Alphabet GOOGL and Meta, which are both are now undervalued.
The consumer cyclical sector, which includes stocks like Home Depot HD and McDonald’s MCD as well as Amazon, traded at a 18% premium coming into this year and is now trading at a 7% discount.
Financial services names look cheaper than they did in January but remain overvalued, while valuations for consumer defensive stocks have remained firmly in overvalued territory. Sekera points out that the largest consumer defensive stocks—Walmart WMT, Costco COST and Procter & Gamble PG—are skewing that valuation because they’re all trading at significant premiums. He thinks many smaller names within the sector look much more attractive.
Is It Time to Buy?
Does a cheaper market mean investors should go shopping? Amid an ongoing selloff, Sekera says it makes sense for investors to bide their time, at least until the market’s trajectory becomes clearer. “We need the market to stabilize and start to move up from here,” he says. “And if it holds those gains, I think then the market will be fine until earnings season starts up again.” But if stocks continue to struggle, he says more losses could be on the horizon.
Sekera continues to advocate for an overweight position on value and small-cap stocks, which are attractively priced compared to Morningstar’s valuations. He advises underweighting growth stocks and large-cap stocks.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
Correction: An earlier version of this story read 2024 instead of 2025 in several places.
