In December 2025, the US stock market is trading at a 3% discount to fair value estimates, with value and small-cap stocks outperforming. Earnings season is over, setting up for a potential Santa Claus rally. Growth stocks are trading at a 7% discount, while small-cap stocks remain the most undervalued.

Investors may want to consider rotating their portfolio into wide-moat stocks, as companies with durable competitive advantages are currently trading at significant discounts to fair value. Sectors like healthcare, communications, and technology show the most value. Real estate is the most undervalued sector at a 10% discount.

Energy and technology sectors are also undervalued, with oil and gas-exploration companies showing potential for growth. Overvalued sectors include consumer defensive, utility, industrial, and financial services. The upcoming 2026 US Market Outlook will provide more insights on investment opportunities and market trends.

As we approach 2026, the market’s focus remains on the ongoing artificial intelligence arms race. There are indications of buyer exhaustion among AI stocks, which may impact market performance. However, positive sentiment from the holidays could lead to a Santa Claus rally. Watch for potential shifts in the market as new trends emerge.

Read more at Morningstar: December 2025 US Stock Market Outlook: Where We See Investment Opportunities