December 2025 US stock market outlook key takeaways

• US stock market trading at 3% discount to the composite of our valuations
• Value and small-cap stocks outperformed in November; both remain undervalued
• Earnings season behind us, and valuations at modestly attractive levels set up for a Santa Claus rally

As of Nov. 28, 2025, the US equity market was trading at a 3% discount to a composite of our fair value estimates of the over 700 stocks we cover that trade on US exchanges. While the Morningstar US Market Index barely eked out a small gain of only 0.24% in November, a composite of the fair valuations of those stocks under our coverage rose faster. By percentage of our coverage, over the course of November, we increased our fair values on 15% of our coverage, outpacing the number of declines by a 2-to-1 ratio. The total capitalization of our valuations rose by $1.15 trillion, which is 1.4% of the market capitalization of the stocks we cover.

US stock market trading at a slight discount

Morningstar’s price/fair value metric dropped to a 3% discount from a 2% discount last month as our fair value increases outpaced November’s slight gain. By capitalization, the greatest fair value increases were made on Nvidia, Advanced Micro Devices, Eli Lilly, Palantir, and Berkshire Hathaway. Partially offsetting these increases, the greatest decreases were made on Novo Nordisk, Autodesk, and McDonald’s.

Value and core stocks outperformed growth stocks in November. The Morningstar US Value Index rose 3.06%, and the US Core Index rose 2.32%, whereas the US Growth Index fell 2.37%. After incorporating the monthly returns and changes to our fair values, both the value and growth categories are attractive, trading at 6% and 7% discounts to fair value, respectively. Core stocks are now trading at a 1% premium as compared with a slight discount last month.

Small-cap stocks outperformed in November as the Morningstar US Small Cap Index rose 2.48%. Comparatively, Morningstar’s US Mid Cap Index rose 0.64%, and the US Large Cap Index declined 0.05%. Small-cap stocks remain the most undervalued, trading at a 15% discount to fair value compared with large cap and mid-cap, trading at 3% and 2% discounts, respectively.

Santa claus rally or AI exhaustion?

As we head into the end of the year and look toward the beginning of 2026, we suspect the market’s focus will remain on the size and duration of the ongoing artificial intelligence arms race and buildout boom.

Over the past few weeks, we have seen some indications of buyer exhaustion among many of the stocks most closely tied to artificial intelligence. After a burst of new deals and partnerships announced in September and October, the news flow dwindled over the course of November. After the recent runup in AI stocks, many of these stocks are now overvalued and overextended compared with our valuations; yet, our valuations of several of the largest AI stocks by market capitalization show that they have further room to run to the upside.

With earnings season behind us and positive sentiment from the holidays, we expect there is a higher probability of the annual Santa Claus rally into year-end as opposed to a general market selloff.

Time to trade up to Wide Moat stocks?

According to our valuations, it appears that the market is overpaying for those stocks of companies that we rate as having no economic moat, or those that we do not believe have long-term, durable competitive advantages that will allow that company to generate excess returns over its cost of capital over the long term. For example, both Micron Technology and Intel are rated with no economic moat, and their stocks are currently trading at 60% and 43% premiums to our fair value, respectively.

We see better value for long-term investors in those categories of stocks that we rate with a wide economic moat. For example, each of Nvidia, Microsoft, Amazon.com, and Meta Platforms are trading at significant discounts to fair value and are each rated with 4 stars.

With the broad market trading at only a slight discount to fair value, we think now is a good time for investors to look to rotate their portfolio into stocks of higher-quality companies.

Where we see value by sector

The greatest changes in our price/fair value metric by sector occurred in the communications, technology, and healthcare sectors.

The Morningstar US Healthcare Index was the best-performing sector in November, rising 9.05%, which was the primary driver behind the sector rising to a 4.0% premium from a 3.0% discount. Similarly, the communications sector is now at only an 8.0% discount as compared with a 15.0% discount after the US Communications Index rose 6.03%, the second-best performing sector in November. Lastly, the technology sector is now trading at a 7% discount compared with a 2% discount last month. The primary driver was the 4.45% decline in the US Technology Index, in which the main culprit was Nvidia, which fell 12.6% in November.

Undervalued sectors

Real Estate

At a 10% discount, the real estate sector regained the crown as the most undervalued sector, as over two-thirds of our stocks under coverage rated 4 or 5 stars. We continue to prefer real estate with defensive-oriented characteristics such as healthcare, wireless towers, and retail. Examples include Healthpeak Properties, Crown Castle, and Realty Income. Considering Morningstar’s economics team forecasts short- and long-term interest rates to decline in 2026, we expect that downward trend should provide a tailwind to valuations.

Energy and Technology

Energy and technology have tied for the second most undervalued sectors at a 9% discount.

Within our energy coverage, we incorporate our midcycle price forecast for oil of $60/barrel for West Texas Intermediate and $65 for Brent. Using the market’s two-year forward strip prices and our forecast, we find many oil- and gas-exploration and production stocks very undervalued, along with the services companies. For example, both 4-star-rated Occidental Petroleum and Devon Energy trade near 30% discounts to our fair value and 4-star-rated SLB trades at a 20% discount.

Within the technology sector, the combination of increases in our fair value estimates and a slight selloff among a few AI stocks resulted in the sector trading at a 9% discount. Four-star-rated mega-cap stocks include Nvidia, Microsoft, and Advanced Micro Devices. We also expect the market will begin to turn its attention toward those companies best positioned to leverage AI in their own products to generate increased economic value, such as 4-star-rated Salesforce, ServiceNow, and Adobe. We also find value among the cybersecurity vendors, such as Palo Alto.

Communications

Valuation of the communications sector is heavily skewed by 3-star-rated Alphabet and 4-star-rated Meta Platforms, which together account for over 70% of the market capitalization of the sector. We also see value among the wireless providers, such as 4-star-rated Verizon and T-Mobile, as we expect this industry will continue to evolve toward an oligopoly in which they will compete less on price and thus allow margins to expand.

Overvalued Sectors

There were minimal changes among the sectors we view as overvalued. Each of the consumer defensive, utility, industrial, and financial services sectors remained overvalued.

The consumer-defensive sector became further overvalued, now trading at an 11% premium compared with 7% last month. The main driver was the 3.61% return from the US Consumer Defensive Index. While the sector is overvalued, we find that the overvaluation is concentrated in Walmart and Costco, whereas many of the food and packaged goods stocks are significantly undervalued. Generally, the utilities, industrials, and financial-services sectors are broadly overvalued and offer few undervalued opportunities.

2026 US market outlook coming in early January

We will be publishing our 2026 US Market Outlook in early January and will follow up with a webinar on Jan. 15, where we will conduct a deep dive into our valuations and those themes we think will be most impactful in 2026 and take as many viewer questions as time allows. Watch for registration details in the weeks ahead.