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Is the market overvalued?

Given the extended rally in stocks, host Romaine Bostick asked Siegel if the entire market is overvalued. His answer was negative.

“No, I mean, we look at the Magnificent Seven, or you call it the Fabulous Four, or just the tech sector, we see 25 to 30 times earnings,” Siegel explained, referring to the price-to-earnings ratio, a key metric used in stock valuation.

Tech is one among the 11 sectors of the stock market, and Siegel highlights the importance of considering valuations in sectors beyond tech.

“You just take out this tech sector, there's 10 other sectors outside of tech, and they're more like 17 times forward earnings, which is an extremely reasonable level of valuation and pretty much on par with historical averages,” he remarked.

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‘Pockets’ of opportunities

To be sure, valuation is not the sole metric that strategists use to identify opportunities. But if you’re looking for value, Siegel sees one group that could have major upside potential.

“When you say about pockets of reasonable and even low valuations, as we know once we get to the mid cap and the small stocks, we're talking about, you know, the mid teens and even the low teens in many of those averages,” he said. “So if we broaden out over here, we still could have a lot of ways to go in a lot of these stocks.”

Mid-cap and small-cap stocks represent companies with medium and smaller market capitalizations, respectively. Mid-cap stocks, typically defined as having a market cap between $2 billion and $10 billion, are often seen as a middle ground between the growth potential of small caps and the stability of large caps. Small-cap stocks, usually with market caps below $2 billion, are considered higher risk but offer higher growth potential.

Both categories can diversify an investment portfolio, though they come with different risk profiles and potential rewards compared to their large-cap counterparts.

For investors who don’t want to pick individual stocks, investing in ETFs can be a strategic way to gain access to the group. For mid-caps, SPDR S&P MidCap 400 ETF Trust (MDY) and the iShares Core S&P Mid-Cap ETF (IJH) are popular options. For small-caps, names like the iShares Russell 2000 ETF (IWM) and the Vanguard Small-Cap ETF (VB) could provide a starting point for further research.

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Jing Pan Investment Reporter

Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.

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