The US stock market is currently trading at a 5% discount to Morningstar’s fair value estimates. Growth stocks are at a discount following recent fair value increases, with small-cap stocks remaining particularly attractive. The greatest fair value increases occurred in commodity-oriented, late-cycle technology stocks.

In January 2026, the US equity market was trading at a 5% discount to a composite of over 700 stocks on US exchanges. Tesla and Taiwan Semiconductor Manufacturing saw significant valuation increases, contributing to the market discount. Higher volatility is anticipated this year due to factors like the spike in long-dated Japanese government bond yields.

The artificial intelligence buildout boom has led to increased fair values for mega-cap stocks tied to AI. Late-cycle technology companies, especially commodity-oriented ones, have seen significant valuation changes. Small-cap stocks are attractive at a 13% discount, while growth stocks are trading at a 12% discount compared to value and core stocks.

Sector valuations have shifted, with energy moving to a 3% premium and technology becoming further undervalued at a 16% discount. Consumer defensive and basic materials sectors are overvalued, while financial services dropped to a 2% premium. Investors are advised to create a barbell-shaped portfolio to balance technology and AI stocks with value stocks.

To take advantage of heightened volatility in 2026, investors can market-weight equities in their portfolio and create a balance between technology and value stocks. Profits from AI stocks can be reallocated to undervalued value stocks in case of a market rally, while value stocks can be sold to increase positions in technology and AI stocks during a market sell-off.

Read more at Morningstar: February 2026 US Stock Market Outlook: Where We See Investing Opportunities