Each month we like to measure market valuations based on the Morningstar stock ratings. The Morningstar Stock Rating measures the level of undervaluation or overvaluation that our analysts calculate for the companies at a global level.
It has a major advantage over the Price/Fair Value metric in that it incorporates a level of uncertainty in the estimations. Two companies may have a very similar price/fair value, but that does not necessarily translate into the same Morningstar rating.
Therefore, looking at the number of stocks that get 4 and 5 stars (stocks considered a buy – green in the chart below) and the number of stocks with 1 or 2 stars (considered a sell – red) can give us a further clue as to whether the stock market is cheap or expensive.
January has been a very positive month for markets. The Morningstar Global Markets index, which reflects the performance of global stock markets, gained 5.3% in Euros.
This good performance has had the consequence that the percentage of stocks with 4 or 5 stars has decreased from 55% to 46% across our entire database (1,443 companies covered by our team of equity analysts). The highest percentage of “cheap” stocks was reached in last September with 67%.
Regarding the stocks with 1 or 2 stars the percentage has increased from last month, passing from 15% to 17%.
The global market is certainly still cheap but not as cheap as those last months. For example, we have to go back to April 2022 to see a percentage of 4 and 5 stars stock below 50%.
Europe or USA?
The stars’analysis also allows us to answer the question of whether Europe is more attractive than the United States. The answer is that Europe is indeed cheaper than the US. For Europe the percentage of stocks with 4 and 5 stars is 63% compared to 52% for the United States. The percentage of expensive stocks is also lower in Europe than in the US: 6% versus 11%.
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