Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.

Banks have an advantage again, JP Morgan is now overvalued

Banks were the big winners for the week, up 4.7%, as JPMorgan Chase JPM and Wells Fargo WFC kicked off third-quarter earnings season. Morningstar analysts believe that financial services companies are now, on average, priced above their fair value, so it’s reasonable to expect below-average returns. JPMorgan’s results were particularly impactful because it is the largest bank in the industry (accounting for 34% of the Morningstar US Bank Index). Analyst Suryansh Sharma believes the stock is now significantly overvalued.

This represents a significant turnaround from 2022, when banks were deeply unpopular and significantly undervalued. This is an important reminder of the role of sentiment in short-term price changes. While the fair value of stocks changes over time, prices typically move more dramatically in response to headlines and have little impact on the real value. The difference between these sentiment-driven prices and a company’s long-term prospects provides investors with the opportunity to earn above-market returns. While prices fluctuate constantly, only occasionally do they deviate enough from fair value to create attractive investment opportunities – generally when we feel the most pressure to follow the herd. This is one of the main reasons why many investors find it difficult to achieve above-average returns.

Banks will continue to report after Columbus Day, including Bank of America BAC and Citigroup C, which report results on Tuesday. You can follow the earnings season calendar and see what Morningstar equity analysts make of the results.

Fee pressure on asset managers

BlackRock BLK also pleased investors as its assets under management exceeded $11.4 trillion. Notably, fees rose more slowly than assets, reflecting a shift to lower-cost products and fee reductions. While lower fees are generally good news for investors, they are also a reminder of the headwinds faced by smaller asset managers and the importance of understanding the quality of the parent company when choosing an investment strategy. Therefore, parent reviews are an integral part of Morningstar’s analysis.

Tesla still overvalued

Tesla’s TSLA stock slumped at the end of the week as the first look at its highly anticipated robotaxi vehicles disappointed investors hoping that autonomous driving will be the next source of significant sales growth. While this isn’t the first time a Tesla launch has gone badly, the stock fell 9% in response. Seth Goldstein believes the company remains overvalued and maintains his fair value estimate of $200 per share. Additionally, insurance analysts at Morningstar recently released a report on the impact of autonomous driving on insurance companies.

China offers opportunities

The Morningstar U.S. index rose 1.2% last week, while other developed markets lost 0.5% and emerging markets lost 1.4%. While a rise in the U.S. dollar contributed to this result, the main culprit in emerging markets was China, which fell 6.6% but rose 28.5% last month following the country’s stimulus package in September. Despite this strong price increase, Morningstar’s investment management team continues to see opportunities in China driven by attractive valuations and the quality of its large technology-focused companies.

Investors expect a rate cut in November

The likelihood of a 25 basis point rate cut at the Federal Reserve meeting in November increased slightly late last week, although core inflation in September came in slightly higher than expected (0.3% versus forecasts of 0.2%). This suggests strong investor belief in the near-term direction of interest rates, which could be challenged by a series of economic data releases this week. Such news is unlikely to be of much importance to long-term investors. You can keep track of these releases with our market calendar.

Highlights of this week’s market and investing events

• Tuesday, October 15: Results from Bank of America BAC, Johnson & Johnson JNJ, UnitedHealth Group UNH, PNC Financial Services PNC, Citigroup C, Charles Schwab SCHW
• Wednesday October 16: Earnings from US Bancorp USB, United Airlines UAL, Kinder Morgan KMI
• Thursday, October 17: Initial Unemployment Insurance Claims Report, Federal Reserve Bank of Philadelphia Index, Retail Sales, Capacity Utilization, Industrial Production, Corporate Inventories, Earnings from M&T Bank MTB, Truist Financial TFC, Huntington Bancshares HBAN, KeyCorp KEY, Netflix NFLX, Taiwan Semiconductor TSM
• Friday, October 18: New Home Construction Report, Earnings from Comerica CMA, Procter & Gamble PG, Fifth Third Bancorp FITB, Regions Financial RF

Check out our full weekly calendar of economic reports, consensus forecasts and corporate earnings.

For the trading week ending October 11th

• The Morningstar US Market Index rose 1.18%.
• The best-performing sectors were technology, up 2.73%, and financial services, up 1.85%.
• The worst-performing sector was utilities, down 2.27%.
• The 10-year US Treasury yield rose to 4.08% from 3.98%.
• West Texas Intermediate crude oil prices rose 0.95% to $75.64 a barrel.
• Of the 703 U.S.-listed companies covered by Morningstar, 422, or 60%, increased, five remained unchanged and 281, or 40%, declined.

Which stocks are in the black?

Arcadium Lithium ALTM, Uber Technologies UBER, Norwegian Cruise Line Holdings NCLH, Zscaler ZS, Carnival CCL

Which stocks are in the red?

Tesla TSLA, Tandem Diabetes Care TNDM, Vistra VST, Myriad Genetics MYGN, Lumen Technologies LUMN