Morningstar market strategist Lochlan Halloway has cautioned that US stocks are nearing full valuation, suggesting that markets may be underestimating risks despite escalating global trade tensions and shifting monetary policy. Halloway highlighted the falling equity risk premium in the US, which is nearing its lowest level since 2008, as an indicator that investors might be complacent. Morningstar is an investment research and management firm. It provides data, research, and insights on investments.
Halloway noted that the period of deep value has diminished, with Morningstar’s US equity coverage now trading at a 3 per cent premium to fair value. This marks a significant shift from early April, when it traded at a near 20 per cent discount. He also pointed out the considerable departure from pre-Trump trade policies, citing a 15 per cent tariff on EU imports as a significant break from the previous trade regime.
Regarding the Australian equity market, Halloway sees limited upside, as it is currently trading at a 10 per cent premium. He noted that while both Australian and US equities have shown strong returns over the past two years, the upside case for US stocks is more apparent due to the AI-driven rally in the Magnificent Seven. In contrast, gains on the ASX have been primarily led by banks, which are less directly linked to long-term growth themes.
Halloway also expressed reservations about the extent to which AI-driven efficiency gains in Australia would benefit shareholders. He suggested that in competitive markets, businesses are often compelled to pass on efficiencies to consumers, drawing a comparison to the airline industry, where decades of innovation resulted in lower fares rather than substantial profits.
