The US stock market ended 2025 on a strong note, recording an impressive growth of over 17%, as indicated by the Morningstar US Market Index. However, at the beginning of 2026, stocks were trading approximately 4% below what analysts consider fair value. This situation raises questions about the stock market’s trajectory for the year ahead.
Morningstar’s Chief US Market Strategist, David Sekera, provided insights in the Q1 2026 stock market outlook, predicting that investors should brace for continued volatility in the market. Factors such as the upcoming appointment of a new Federal Reserve chair in May, ongoing trade and tariff negotiations, and the looming midterm elections could significantly influence market stability and investor sentiment.
In terms of stock valuations, a contrasting picture emerges when analyzed through investment styles and sectors. Small-value stocks are currently identified as the most undervalued, trading 23% below their fair value estimate. On the other hand, stocks in the mid-cap core and growth categories appear overvalued. Sector-wise, consumer defensive and financial-services stocks are also deemed to be overvalued, while sectors such as real estate, technology, energy, and communication services show strong undervaluation in the first quarter.
To assist investors navigating this landscape, Morningstar has compiled a list of 33 stocks deemed undervalued, providing a strategic approach for those looking to capitalize on market opportunities. Some notable mentions from the list include Albemarle (ALB), Alliant Energy (LNT), and Microsoft (MSFT), among others. Each stock featured comes with specific commentary regarding its valuation and potential for future growth.
Examining key sectors reveals varied performances in 2025. Basic materials stocks performed in line with the overall market, with a high percentage—55%—rating 4 or 5 stars based on Morningstar ratings. In the chemicals and agriculture industries, around three-fourths of stocks are considered undervalued.
The communication-services sector notably outperformed the broader market, largely driven by Alphabet’s substantial market presence. Consumer cyclical stocks, conversely, lagged behind, with 45% of covered stocks falling into the 4 or 5-star category and offering the most significant discounts in apparel and travel sectors.
In the energy sector, a significant downturn occurred, attributed to negative sentiment around oil prices, leading to a lack of performance compared to the broader market. Meanwhile, the financial-services sector demonstrated resilience, outperforming overall market trends; however, there are limited pockets of value available.
Healthcare stocks generally underperformed last year, particularly within the healthcare plans and provider sectors, which are characterized by undervalued stock offerings. The industrials sector received a mixed review, with many stocks in construction machinery remaining undervalued, despite the sector being considered fully valued overall.
Real estate stocks faced considerable challenges in 2025, with two-thirds of the sector’s names categorized as undervalued. Movements in interest rates have heavily influenced the performance of Real Estate Investment Trusts (REITs).
In the technology arena, stocks achieved positive growth, fueled by strong long-term prospects in sectors like cloud computing and artificial intelligence. Conversely, utilities stocks experienced strong market performance but face challenges ahead, particularly concerning their current valuations and earnings growth expectations.
For investors seeking to identify undervalued stocks, various metrics such as price-to-earnings ratios and growth potential can provide valuable insights. At Morningstar, stocks rated with 4 or 5 stars are considered undervalued, while those at 3 stars are deemed fairly valued, and stocks rated 1 or 2 stars are categorized as overvalued.
As 2026 unfolds, the market’s mixed signals combined with external pressures necessitate careful scrutiny from investors looking to strike a balance between risk and opportunity in their investment strategies.
