The US stock market was up more than 10% for the first half of 2026, according to the Morningstar US Market Index. Heading into the second half of 2026, stocks were trading 8% below our fair value estimate.
What might that mean for the remainder of the year?
“While the US equity market is attractively valued at an 8% discount to our valuations, we do not think that is enough margin of safety to overweight equities above an individual investor’s long-term asset-allocation targets,” writes Morningstar chief US market strategist David Sekera in his Q3 2026 stock market outlook. He notes that the market is pricing in at least one interest rate hike by the end of the year, and he thinks the greatest risk to the market remains the rate of spending on the artificial intelligence buildout boom.
Which Stocks Are Most Undervalued?
Here’s how stock market valuations look through two different lenses:
By investment style, small-value stocks are the most undervalued, trading 21% below our fair value estimates. Meanwhile, mid-growth stocks look overvalued.
By sector, consumer defensive and utilities stocks look the most overvalued. Technology and communication-services stocks look most undervalued heading into the third quarter.
33 Undervalued Stocks to Buy Before the Market Catches On
Here’s the new list of top stock picks from Morningstar’s analysts for the third quarter of 2026.
Here are some key metrics about each undervalued stock to buy and commentary about each sector. Data for the analyst stock picks is as of July 8, 2026.
Basic materials
stocks performed on par with the broad market during the first half of 2026. Morningstar senior analyst Seth Goldstein reports that less than 50% of the stocks that Morningstar covers in the sector are trading with
Morningstar Ratings
of 4 stars, and none are trading at 5-star levels. Most of the stocks in the metals and mining industry are overpriced.
The
communication-services
sector underperformed the broad market during the first half of 2026. SpaceX SPCX has renewed uncertainty across the communications sector, especially telecom services, observes Morningstar sector director Michael Hodel. About half of the stocks we cover in the sector are trading in the 4- and 5-star range.
Consumer cyclical
stocks underperformed the market during the first half of 2026. About half of the stocks that we cover in the sector are trading in the 4- and 5-star range, says Morningstar sector director Erin Lash. The apparel and travel industries look particularly attractive, she adds.
3 Stocks to Buy and 3 Stocks to Sell for July
Plus, our take on Micron’s blockbuster earnings.
44m 5s
Consumer defensive
stocks performed in line with the broad market in the first half of 2026, and more than 40% of the companies we cover are trading in 4- or 5-star territory, says Morningstar’s Lash. We think the alcoholic beverages and consumer packaged goods industries are especially attractive.
Energy
stocks outperformed the broader market during the first half of the year, rallying during the first quarter, but pulling back in the second. Morningstar sector director Josh Aguilar reports that there are few undervalued stocks in the sector today.
The
financial-services
sector has underperformed the broad market so far in 2026. Morningstar sector director Sean Dunlop says there are attractive ideas to be found in the capital markets and credit services industry groups.
Healthcare
stocks have underperformed the broad market so far in 2026. We see several undervalued opportunities across biopharma, medical devices, and distributors, reports Morningstar director Karen Andersen.
Industrials
stocks outperformed the broader market during the first half of the year. While the sector overall looks fully valued, Morningstar director Suryansh Sharma reports that there are compelling investment opportunities in the farm machinery, aerospace and defense, and construction industries, in particular.
Real estate
stocks are outperforming the broad market in 2026 so far. Yet the sector is still trading below our fair value estimates, says Morningstar senior equity analyst Kevin Brown. Improvement in net operating income growth has helped the sector this year, he adds.
Technology
stocks outperformed the broad market during the first half of 2026 despite lagging during the first quarter. We remain confident in secular tailwinds in tech, including cloud computing, artificial intelligence, and the long-term expansion of semiconductor demand, says Morningstar senior equity analyst Dan Romanoff. After months of poor performance, we see software as offering the most upside within the sector, he adds.
Utilities
stocks underperformed the market during the first half of 2026. Morningstar senior analysts Travis Miller and Andrew Bischof say: “Data centers and their huge energy needs are coming. Investors have been buying utilities stocks for several years, anticipating this growth. Now that growth is showing up in earnings. This earnings growth should keep pushing utilities stocks higher, offsetting the sector’s historically low yields. But to sustain that growth, utilities must work with many stakeholders to ensure new infrastructure to serve data centers doesn’t lead to unusually large rate increases for all other customers.”
How to Find Undervalued Stocks to Buy
Undervalued stocks are those that trade below what they’re worth. Investors can turn to several metrics to gauge a stock’s worth. Some investors use standard metrics, such as P/E or price/cash flow. Others may look at a stock’s price relative to a company’s future growth prospects or at where a stock is trading relative to its 52-week high price.
How Morningstar Rates Stocks
Unpacking the Morningstar Rating for stocks, The Morningstar Economic Moat rating, and other metrics for evaluating stocks.
8m 29s
The author or authors do not own shares in any securities mentioned in this article.
Find out about Morningstar’s editorial policies.
United States