S&P 500: It’s time to sell three of the index’s top 10 stocks, according to Morningstar

Only 10 stocks are doing all the lifting on the S&P 500 this year. But that sounds too much like a good thing: Now three of them are overvalued, Morningstar says.


Apple (AAPL), Nvidia (NVDA) and Broadcom (AVGO) — which together account for nearly 40% of the S&P 500’s market value gain this year — are trading more than they are worth, according to a new report from David Sekera, U.S. market strategist at Morningstar. And just one of the 10 most value-generating stocks on the S&P 500 — Alphabet (GOOGL) — is still undervalued.

Seeing all those overvalued giant stocks is new this year. In 2023, nine of the 10 S&P 500 stocks that lead the market were considered undervalued by Morningstar. “(The) tech sector (is) overvalued as stocks soar on excitement surrounding artificial intelligence,” the report said.

But not all investors would agree. It’s important to note that many leading stocks are “overvalued” using traditional metrics – just when they take off. Selling too early, especially with stocks like Nvidia, could rob investors of big gains.

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Concerns of a very heavy S&P 500

At first glance, the S&P 500 appears to be booming. The SPDR S&P 500 Trust ETF (SPY) is up nearly 12% this year. That’s enough to put $3.8 trillion of wealth in investors’ pockets.

But if you dig a little deeper, you see how precarious the situation is. Only 10 actions generate all the winnings. Besides Apple, Nvidia and Broadcom, the stocks that fuel the S&P 500 are Microsoft (MSFT), Amazon.co.uk (AMZN), Metaplatforms (META), You’re here (TSLA), Advanced micro-systems (AMD) and Selling power (CRM).

The rally is very heavy on growth stocks, says Sekera. “The rally so far this year has been heavily concentrated in the growth category, which has climbed 19.29%, while core stocks have lagged, rising only 2.11%, and the value lost ground, at minus 2.23%,” he said.

Morningstar now thinks large-cap growth stocks in the S&P 500 are fully valued. But value-priced stocks, especially smaller ones, are undervalued by around 40%. The energy values ​​are also undervalued.

What does it mean if you own the tech stocks that have risen this year? Sell, suggests Morningstar.

“The tech sector is now the most overvalued sector, trading at a 4% premium to our intrinsic valuations, compared to earlier this year trading at a 19% discount” , Sekera said. “While individual opportunities remain, from a sector perspective, we believe now is a good time to take profits and move to an underweight position.”

What to do with Nvidia?

Nvidia is one of those battleground stocks though. Trading for a PE of over 200, it looks overvalued using traditional metrics. But IBD’s methodology encourages investors to hold on. Only after falling below the 10-week moving average of 313 would it be time to consider selling. And Nvidia shares, at 385, are still well above those levels.

Most of the best tech is overrated: Morningstar

The main contributors to S&P 500 gains this year

Business Symbol Contribution to S&P gain in 2023 Change since the beginning of the year morning stars Assessment
Apple (AAPL) 20.1% 38.2% 2 Overvalued
Microsoft (MSFT) 19.2 40.1 3 Just value
Nvidia (NVDA) 16.2 168.0 2 Overvalued
Alphabet (GOOGL) 12.2 42.8 4 Undervalued
Amazon.co.uk (AMZN) 11.3 49.2 3 Just value
Metaplatforms (META) 10.1 125.5 3 Just value
You’re here (TSLA) 8.0 76.7 3 Just value
Broadcom (AVGO) 2.7 43.5 2 Overvalued
Selling power (RCMP) 2.3 58.3 3 Just value
Advanced micro-systems (AMD) 2.0 82.1 3 Just value
Sources: Morningstar, S&P Global Market Intelligence, IBD

Follow Matt Krantz on Twitter @mattkrantz


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