The S&P 500’s blistering streak continues after a third straight week of gains and a 9.1% rise in July. Add to that a better-than-expected earnings season and strong economic data, and the market could be poised to move on from a dramatic first half. That’s certainly a view shared by Morningstar’s chief US market strategist, David Sekera. “At the start of the year, we thought the markets were overvalued. We highlighted four main headwinds the market was going to face this year and these headwinds really happened in the first half of the year. “, Sekera told CNBC “Squawk Box Asia” on August 4. “But I think we’re at the point where those headwinds are starting to dissipate. And in fact, by the end of the year, those headwinds might even start turning into tailwinds.” Sekera acknowledged that inflation and the specter of further interest rate hikes by the US Federal Reserve have continued to weigh on market sentiment, but sees pressures on both fronts easing. For example, he sees “pretty steep declines” in oil prices over the next few years, which could add to deflationary pressures. By 2026, US benchmark West Texas Intermediate crude and global benchmark Brent crude could reach $55 and $60, respectively, according to Morningstar projections. Brent crude futures were trading around $94 a barrel on Monday, while US West Texas Intermediate futures were trading around $88 a barrel. Additionally, the Fed is likely done with most of its rate hikes this year, according to Sekera. Morningstar expects inflation to average 5.8% this year and fall to 2% next year. ‘High quality’ names that are oversold Thus, Sekera believes that the market overreacted by selling ‘high quality’ names at the height of the market turmoil as valuations were ‘pushed too far’. “At the worst of the US selloff, we saw a lot of blind selling, portfolio managers getting to the point where they just had to start selling what they could rather than what they wanted. “, did he declare. As a result, several companies rated four and five stars by Morningstar now appear oversold, according to the strategist. These stocks have a wide “economic gap” (or competitive edge) and the best long-term advantages over rivals, he said. Morningstar uses a star rating system to help investors find undervalued stocks. The higher the discount to fair value of the stock, the higher the star rating and the more attractive the stock. JPMorgan is one such stock, which Sekera says is trading at a 25% discount to its fair value. He also likes Honeywell and 3M in the industrials sector, adding that the shares are trading at discounts of 18% and 23%, respectively. Sekera sees “a lot of opportunity” in the technology sector. Cybersecurity in particular was an “interesting” topic that caught his attention, especially in light of the war in Ukraine. His top picks in this space are the four-star Palo Alto and Zscaler, which he says are trading at 13% and 25% discounts to their fair values, respectively. “Meanwhile, I think Okta is really attractive for investors who are looking for something that will be a bit riskier but has more upside potential. It’s one of our most undervalued stocks that is trading at around half its fair value and is rated five stars.” he said. Rounding out its list is Starbucks, which is trading at a 16% discount to its fair value.
High-quality stocks oversold as market headwinds fade