Morningstar: U.S. Stocks Closer to Fair Value, Expects Fed Rate Cuts in 2023 As Inflation Falls

The U.S. equity market is closer to a 10% discount to fair value after the recent selloff. Morningstar expects the Fed's next move to be cutting rates in 2023.

Inflation is falling greatly in 2023 and should be back to the Fed's 2% target in 2024. Strong economic growth is expected in Q3 but will likely slow in Q4.

The energy sector has been the top performer quarter-to-date given the rise in oil prices. The utilities sector has become very attractive given the selloff related to rising interest rates.

Morningstar's chief economist expects the Fed to cut rates aggressively in 2024-2025, bringing the fed funds rate below 2% by 2026. This is faster than the market expects.

While headline CPI inflation has fallen from peak levels, core inflation is also now declining. Morningstar raised its inflation forecast slightly but still sees it moderating.