The U.S. stock market finished 2025 up by more than 17%, according to the Morningstar U.S. Market Index, the firm’s investment specialist Susan Dziubinski wrote in a blog post this week. At the start of this year, stocks were trading 4% below Morningstar’s fair value estimate, she said.
What does that augur for the year ahead?
“As we enter 2026, we anticipate further volatility,” Morningstar’s chief U.S. market strategist David Sekera wrote in his outlook for the coming year. “Artificial intelligence stocks require even stronger growth to support lofty valuations.”
Meanehile, a new Federal Reserve chair in May, trade and tariff negotiations, and midterm elections will test investors’ resolve, he wrote.
According to Dziubinski, Morningstar based its stock market valuations on how they look through two lenses.
By investment style, small-value stocks are most undervalued, trading 23% below Morningstar’s fair value estimate. In contrast, mid-cap core and growth stocks look overvalued.
By sector, consumer defensive and financial services stocks appear the most overvalued in the first quarter, while real estate, technology, energy and communication services stocks look more undervalued.
See the gallery for Morningstar’s 33 undervalued stock picks and analysts’ commentary about each sector.
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