In 2025, the US stock market rose over 17%, but by the beginning of 2026, stocks were trading 4% below the fair value estimate provided by the Morningstar US Market Index. Volatility is expected in 2026, especially in artificial intelligence stocks due to lofty valuations and potential market challenges like a new Federal Reserve chair and trade negotiations.

According to Morningstar’s Q1 2026 stock market outlook, small-value stocks are most undervalued, trading 23% below fair value, while consumer defensive and financial-services stocks are the most overvalued. Morningstar analysts have identified 33 undervalued stocks, including Albemarle, Comcast, and Microsoft, offering potential investment opportunities for the first quarter of 2026.

Morningstar analysts report that basic-materials stocks performed on par with the market in 2025, with three-fourths of chemicals and agriculture stocks underpriced. Communication-services stocks outperformed, driven by Alphabet, while consumer cyclical stocks underperformed, presenting discounts in apparel and travel sectors.

Consumer defensive stocks lagged in 2025, but nearly half are trading in 4-5 star territory, particularly in alcoholic beverages and consumer packaged goods. Energy stocks significantly underperformed due to negative sentiment on oil prices, with exploration and production subsector offering undervalued stocks.

Financial-services sector outperformed the market in 2025, with minimal value pockets identified. Healthcare stocks lagged, especially in healthcare plans, and industrials stocks slightly outperformed. Real estate stocks underperformed, driven by interest rate movements, while technology stocks finished ahead, particularly in software sector. Utilities stocks outperformed, but valuations are a concern due to high P/E multiples.

Read more at Morningstar: 33 Undervalued Stocks to Buy This Quarter