Australian equities are currently around 6 per cent overvalued based on Morningstar’s fair value estimates for the 200 stocks it covers in Australia.
Speaking in an equities update on Thursday, Morningstar strategist Lochlan Halloway said the market was back to overvalued following the sharp rally since April.
The ASX finished the June quarter at 8,542 points, up 9 per cent on March and just shy of a record.
Morningstar considers a fair price-earnings ratio for the ASX to be 17 times at the moment.
“We’re currently around 20 times at the moment, which suggests [the market] is overvalued,” Halloway said.
“That’s not surprising given that we see the market as overvalued based on our fundamental ratings.”
Halloway noted, however, that the Australian market has been significantly more overvalued for much of the previous decade.
“Current valuations [are therefore] not a huge concern for us and most importantly we still see plenty of attractive opportunities across most sectors,” he said.
“About a third of stocks in Australia are four or five star rates and a third of those have moats, so there’s still plenty of good quality stocks trading at attractive prices.”
Many of these are in the healthcare and consumer sectors, according to Morningstar.
It also considers energy to be the most undervalued sector despite high share prices in recent months.
Halloway said while healthcare has underperformed in recent years mainly due to the rapid cost of inflation, difficulty in raising prices and now US tariffs, there are still a lot of good quality stocks trading at attractive prices in which they think the outlook will improve soon.
“Cost inflation is subsiding, and you can see here that prices for private hospital visits have risen about 4 per cent in the past year after successful negotiations with the private health insurers,” he said.
“We think that’s going to drive solid earnings growth from fiscal 2026 for Ramsay Health Care, which is our top pick in the sector. We also like Sonic Healthcare which has a similar story of prices rising to recoup higher costs.”
The outlook for consumer stocks is also improving, according to Morningstar.
“Cost-of-living pressures are easing as household disposable incomes are now growing faster than inflation,” it said.
“Currently, most of the improvement in incomes is being saved but as that savings rate increases to long-term averages of around 6 per cent then more income will start being diverted to spending which will benefit retailers.”
Morningstar also expects interest rates to fall modestly, which should further support retail spending.
“We expect retail sales to increase by around 4 per cent in FY26 and that should offset higher wages and other costs and push profits higher,” Halloway said.
“Our top picks include liquor retailer Endeavour Group. Its share price has been down over the past few years because of soft sales but it’s a good quality business with cost advantages from its huge scale, and we think liquor sales will improve alongside household incomes.”
At the other end of the spectrum, Halloway said Morningstar doesn’t see much value in financials or utilities.
“We think CBA is around 75 per cent overvalued while ANZ is 6 per cent undervalued so we think the market is being a bit irrational with the pricing here,” Halloway said.
“General insurers are also expensive. While IAG and QBE are performing well at the moment, thanks to rising premiums and interest income, they are cyclical businesses and good times tends to lead to more competition which then drives returns back down, so we’re bearish on insurers.”
