US stock market outlook: Where we see investing opportunities in March
Stability at the surface, turbulence below.
Key takeaways
- The US stock market is trading at a 7% discount to the composite of our valuations.
- Market volatility looks calm on the surface, but sector rotation is intense.
- Software stocks are under heavy pressure from rising fears of artificial intelligence disruption.
- Investors are shifting toward sectors that are viewed as being less exposed to AI displacement.
As of Feb. 27, 2026, the US equity market was trading at a 7% discount to a composite of the fair value estimates of the over 700 stocks we cover that trade on US exchanges. While the Morningstar US Market Index fell 0.63% during February, the composite of our fair values held steady, thus resulting in a lower price/fair value metric.
Stability at the surface, turbulence below
In our 2026 Market Outlook, we warned that a number of key emerging risks could lead this year to being more volatile than 2025. However, for the year to date, broad market indexes have traded within a relatively narrow range, fluctuating less than 3% from peak to trough. Yet, this stability masks significant sector‑level rotation occurring beneath the surface.
For example, through the end of February, the Morningstar US Energy Index soared 24.97%, the Morningstar US Basic Materials Index rose 18.73%, and the Morningstar US Industrials Index climbed 16.99%. To the downside, the Morningstar US Financial Services Index dropped 5.95%, and the Morningstar US Technology Index declined 5.41%. While the financial-services and technology sectors have not fallen to the same degree as the other sectors have risen, since these sectors are such a large proportion of the overall capitalization of the market, it only takes a relatively small percentage to come out of these sectors to have an outsize impact on smaller sectors.
Within the technology index, software companies have borne the brunt of the selloff, with many names falling 30% to 40% just this year. While software stocks have been sliding for well over a year, the selloff gained steam as several AI providers have begun to release new applications that the market is anticipating may disrupt or displace these companies’ products and services, thus lowering future earnings expectations and valuations.
The artificial intelligence buildout boom remains in a rapid expansion phase as the hyperscalers have committed to even greater capital expenditures to build out their AI platforms. However, many AI hardware stocks have traded in a narrow range since last August. It is becoming increasingly obvious that the market no longer cares about this quarter’s earnings, next quarter’s earnings, or even this year’s earnings, but has become increasingly skeptical as to the amount of growth yet to come over the next three to five years. Investors are increasingly questioning whether the increased capex spending today will translate into enough future revenue to justify the high level of spending.
As skepticism about the sustainability and ultimate profitability of AI‑driven growth increases and as concerns rise about the degree to which software companies could be structurally disrupted, investors have rotated toward sectors perceived as less vulnerable to AI displacement.
Following US military action, what should investors monitor?
In the fog of war, it’s always difficult to separate what’s real from what’s propaganda. In an era of social media where anybody can post anything, especially with what we’re seeing with AI and deepfakes, oil markets likely reflect the best insights as to the on-the-ground situation.
The reason to watch oil prices more closely than the other markets is that the oil market is generally limited to the largest and most sophisticated institutional investors and industry players. This is not a market that can be skewed by retail investors or advisors playing in oil futures.
Global energy giants like BP BP and Exxon XOM have experts everywhere in the world watching oilfields and pipelines. These contacts can immediately call in on their satellite phones and give up-to-date information to trading desks about damage reports and estimates when these facilities can be repaired and brought back online. Global macro hedge funds have spent years cultivating industry experts and are willing to pay exorbitant fees to gain an informational edge ahead of others. These players have the best real-time information out there—probably even better than most governments. By the time the rest of us hear anything, it’ll likely already be old news to them.
The amount and velocity of change in oil prices will quickly reflect the most up-to-date and accurate portrayal of what’s happening on the ground. Rising oil prices indicate the situation is deteriorating; falling prices indicate the situation is moderating.
US stock market trading at a discount
For the year to date, the Morningstar US Value Index has risen 7.32%, bringing the style close to our composite valuation. However, following the selloff in technology stocks, which are overweight in the growth category, growth stocks have become increasingly undervalued.
By capitalization, the Morningstar US Mid Cap and Small Cap Indexes have risen 7.04% and 6.42%, respectively, whereas our Large Cap Index dropped 1.38%. Even after the outperformance, small-cap stocks remain the most undervalued, now followed closely by large-cap stocks after their underperformance.
Where we see value by sector
As compared with last month, the technology sector became further undervalued, dropping to a 20% discount from a 16% discount last month. The preponderance of the change was driven by a 3.84% decline in the Morningstar US Technology Index. Software stocks suffered the deepest and broadest declines within the technology sector.
The communications sector also became further undervalued as the Morningstar US Communications Index fell 5.14%. The sector is now at a 10% discount to a composite of our fair values.
Lastly, the consumer cyclical sector dropped to a 7% discount following a 5% drop in the Morningstar US Consumer Cyclical Index.
The utilities sector rose back to a high premium following a 9.72% surge in utilities stocks, and similarly, the energy sector is now at a slight premium following its 9.51% rally last month. Lastly, basic materials rose 8.38%, pushing the sector further into overvalued territory.
Don’t overreact
So long as military action is ongoing, it will continue to pressure markets, especially in higher-risk assets and economically sensitive sectors. For investors whose portfolios are in line with their targeted long-term asset allocations, we wouldn’t make big moves here. However, the current market volatility is providing an opportunity for investors to take profits in those sectors and stocks that have traded higher into overvalued territory in the short term and reinvest in those sectors and stocks that have sold off too far. This was one of the key reasons we advocated for a barbell-shaped portfolio this year, balanced between deep-value stocks on one hand and AI technology stocks on the other.
For example, value stocks have soared in a flight-to-safety bid, and those profits can be used to reinvest in those growth stocks that have sunk too far. Attractive swap candidates, including using profits on oil producers and food manufacturers to reinvest in cybersecurity stocks, have been dragged lower by the broad software selloff.
