US Stock Market Exceeds Fair Value – What’s Next in 2025?

The first half of the year has seen the US stock market rise close to 6%, as gauged by the Morningstar US Market Index. This points to stocks entering the season’s third quarter at a figure that is 1% past the organization’s estimate of fair value. The question arises – what are the implications for the latter half of 2025?

Given the present state of affairs, there is an indication from Morningstar’s head U.S. market strategist in the quarterly stock market forecast that we might witness a shift back to volatility in the coming summer months.

Currently, with the premium present, it’s apparent that the stock market isn’t offering any sort of buffer to counteract potential drops, particularly if tariff discussions face difficulties or if earnings projections for the upcoming third quarter fail to meet investor expectations.

Taking into account different investment styles, it appears that small-value stocks are presently being undervalued the most, as they are trading at a rate that is 25% beneath the fair value estimation set by Morningstar. On the other side of the spectrum, large-cap and mid-cap growth stocks seem to be priced overly high.

Examining the trends by sector, stocks within the financial services and consumer defensive sectors appear to be the most overpriced as we transition into the third quarter. In comparison, stocks in the communication services sector seem to be the most undervalued.

This viewpoint provides an overview of valuation distributions among various sectors and adds further depth by including key Morningstar metrics about each undervalued stock that is worthy of purchase.

The data provided here regarding individual stocks is all current as of July 4, 2025.

It can also be useful to take into account the fact that the stock market situation is fluid and ever-evolving, meaning that while the current analyses are based on the most recent information, they may not necessarily reflect the situation as it will evolve in the future.

The market’s dynamics strongly suggest that diversification of investment, both in terms of sectors and in terms of investment size (small vs. large/mid cap stocks), may be a wise strategy for mitigating risks as we move into the third quarter.

It’s important to remember that the current market conditions, as indicated by these valuations and trends, do not dictate future outcomes. Investors should always conduct their own research and consider multiple factors before making any investment decisions.

Factors such as changes in government policies, shifting customer preferences, technological innovation, international trade deals and conflicts, among others, can significantly impact the future state of these undervalued and overvalued stocks.

In addition to considering the current stock price and valuation, investors may also benefit from investigating a company’s potential for growth, the stability of its industry, and its history of profitability. These factors can provide valuable insight into a stock’s true value beyond its current market price. This holistic view of the stock evaluation process can help in making informed decisions.

Volatility in the stock market, although often viewed as a negative phenomenon, can also present opportunities for profit. Investors who understand how to harness volatility can often secure gains during periods of market fluctuation.

However, it requires a deep understanding of the stock market mechanism, the ability to identify trends, as well as a strong capacity to handle risk and uncertainty. Educating oneself about these aspects and seeking advice from financial experts can always be beneficial.

Finally, the value of staying updated with regular market reports such as Morningstar’s stock market outlooks is emphasized. These reports not only keep investors informed about current trends but can also guide them to make more confident and timely decisions.

In conclusion, the stock market dynamics are complex, constantly changing, and influenced by an array of factors. Investors need to keep abreast of these changes and adjust their strategies accordingly to navigate their investments towards a profitable destination.