U.S. Stock Market Outlook for 2026
The Morningstar U.S. Market Index indicates that the U.S. stock market dropped roughly 4% during the first quarter of 2026. As we move into the second quarter, stocks are trading about 14% below what we consider fair value.
What could this spell for the remainder of the year?
According to David Sekera, Morningstar’s chief U.S. market strategist, stocks are undervalued, and there are justifiable reasons for this. He points out that the future remains quite uncertain due to ongoing tensions in Iran and potential challenges in broader economic dynamics. Sekera encourages investors to capitalize on market fluctuations—essentially, to cash out on overvalued stocks and channel those profits into undervalued ones.
Which stocks are the most undervalued?
Looking at stock market valuations from different angles, we can gather some insights.
- When categorized by investment style, large-cap growth and small-cap stocks stand out as the most undervalued, trading at about 25% below fair value estimates. Conversely, large-cap and core stocks appear to be fairly valued.
- From a sector perspective, energy and consumer defensive stocks are notably overvalued. In contrast, technology, communications services, real estate, and consumer cyclical stocks seem to be undervalued as we enter the second quarter.
33 undervalued stocks to consider
Here’s a selection of Morningstar Analyst Picks for Q2 2026.
- Black Stone BX
- Broadcom AVGO
- Carmax KMX
- Clorox CLX
- CNH Industrial CNH
- Comcast CMCSA
- Devon Energy DVN
- Dow Dow
- Edison International EIX
- Elevance Health ELV
- Energy Transfer ET
- Flutter Entertainment FLUT
- GE Healthcare Technologies GEHC
- General Mills GIS
- Healthpeak Properties
- HF Sinclair DINO
- Invitation Homes INVH
- IQVIA IQV
- Kilroy Realty KRC
- Coles KSS
- LPL Finance LPLA
- Market Access Holdings MKTX
- Masco MAS
- Microsoft MSFT
- Mondelez International MDLZ
- Mosaic Company MOS
- NXP Semiconductor NXPI
- Portland General POR
- PVH Corp. PVH
- Omnicom Group OMC
- Qorvo QRVO
- The Walt Disney Company DIS
- WEC Energy Group WEC
These undervalued stocks come with metrics that highlight their potential and some commentary about their respective sectors. As of March 30, 2026, this stock pick data is relevant.
Interestingly, basic materials stocks showed better performance than the overall market in the initial quarter. However, Morningstar senior analyst Seth Goldstein noted that fewer than 40% of stocks in this sector hold a 4-star rating, with none achieving a 5-star level, indicating high valuations across metals and mining stocks.
Shifting gears, the communications services sector lagged behind the market during the first quarter, largely due to underperformance from significant players like Meta Platforms and Alphabet, which together represent a hefty portion of this sector’s market capitalization. About 40% of stocks here trade in the 4-star and 5-star range.
Consumer cyclical stocks were also down in the first quarter. Erin Rush, Morningstar’s sector director, mentioned that nearly half of the stocks in this sector fall within four- or five-star ratings, particularly in the apparel and leisure industries facing serious discounts.
On a brighter note, consumer defensive stocks outperformed the broader market in 2026. Around 37% of these companies are enjoying 4-star or 5-star ratings, with alcoholic beverages and consumer products looking especially promising.
Energy stocks, inspired by the ongoing situation in Iran affecting oil prices, significantly outperformed the market as well. Josh Aguilar from Morningstar shared that there are not many undervalued stocks available in this sector at the moment.
The financial services sector has had a rough start to 2026. Sean Dunlop, sector director at Morningstar, believes there are still good investment options in wealth management and credit services.
Healthcare stocks have kept pace with the broader market so far this year, with many in the healthcare plan industry showing signs of being undervalued. According to Karen Andersen at Morningstar, over half of the stocks in the device industry also appear undervalued.
Meanwhile, industrial stocks actually managed to outperform in the first quarter. Even though the sector seems adequately valued overall, director Suryanshu Sharma identified attractive opportunities in agriculture and construction.
On the real estate front, stocks have done well, with approximately two-thirds trading in the 4- or 5-star categories. Kevin Brown, a senior equity analyst, suggests that interest rates are influencing performance, particularly among REITs.
In tech, stocks have missed the mark lately, trailing behind the market’s performance in the first quarter. However, analyst Dan Romanoff remains optimistic about long-term growth factors like cloud computing and AI, suggesting that software could be a major winner in the sector moving ahead.
Utility stocks outperformed in the early part of 2026. Despite this, analysts Travis Miller and Andrew Bischoff highlight that valuations are a challenge for the sector this year, with dwindling dividends and high P/E ratios presenting significant headwinds.
Finding undervalued stocks
Identifying an undervalued stock means discovering one that’s trading below its intrinsic value. Several metrics can aid investors in evaluating this, such as the price-to-earnings (P/E) ratio or comparing stock prices with a company’s growth potential or its 52-week high.
Morningstar categorizes undervalued stocks as those trading below calculated fair value estimates, calling them “adjusted stocks.” Their rating system includes uncertainty—stocks rated 4 or 5 stars are seen as undervalued, while those with 3 stars are fairly valued, and 1 or 2 stars indicate overvaluation.
