More US tech stocks look cheap as the market rotates
Meanwhile, value-leaning areas of the market, including industrials and energy stocks, are moving out of undervalued territory.
Key takeaways
- Amid the investor rotation out of the sectors that had led the bull market, valuations have flipped. Those that had once been expensive now look cheap, and vice versa.
- The industrials sector has the greatest percentage of overvalued stocks covered by Morningstar analysts today, as they advise caution around jumping into the AI buildout trade.
- The tech sector currently accounts for the highest percentage of undervalued stocks in the market, having reversed from being heavily overvalued.
The current stock market rotation isn’t just about performance, but also shifting valuations. Expensive areas have started to look undervalued, while historically cheaper sectors have started to inflate. Most recently, many technology and consumer cyclical stocks have fallen into undervalued territory, while industrials and basic materials have gotten more expensive.
The tech sector has taken a beating this year amid growing concerns over artificial intelligence disruption and investment. After a standout 2025, tech returns are down 1.97% in the last three months, compared with their 21.43% gain over the previous year.
Meanwhile, industrials and basic materials—two “old economy” sectors historically considered value-leaning—have been juggernauts, leading the market with returns up 21.92% and 25.68% in the last three months, respectively.
Tech valuations move into discount territory as AI fears look overblown
Tech stocks are off to a rough start in 2026, with a sharp selloff at the beginning of the month driving valuations into what some say is attractive territory.
February kicked off with a sharp software-stock selloff following Anthropic’s release of a new tool designed to automate legal work. A three-day double-digit selloff of software stocks ensued as concerns around AI disruption bubbled over.
The sector has seen a notable shift toward lower valuations over the past year. At present, 26.03% of all undervalued stocks with Morningstar’s coverage fall within tech, up from 8.91% a year ago and 17.33% just three months ago. In the face of price volatility, two-thirds of today’s undervalued tech stocks are in the software industry.
Since Feb. 3, shares of Workday WDAY are down nearly 25%, while Adobe ADBE and ServiceNow NOW have each fallen roughly 12%. Salesforce CRM stock has lost 9%. “[The tech sector] has still got a long runway for growth here ahead of artificial intelligence and the buildout boom, and there’s still a number of stocks that we think are undervalued,” says Morningstar chief US market strategist Dave Sekera.
Morningstar analysts see all these stocks as significantly undervalued with 5-star ratings. Sekera points to their recent earnings reports as reason to paint the software industry in a favorable light. ServiceNow beat revenue expectations in its fourth quarter, while Adobe posted its sixth consecutive quarter of stronger-than-expected revenue. Salesforce posted revenue in line with expectations, with annual recurring revenue for its AI-driven data platforms up 114%.
Mega-cap companies like Meta Platforms META are also driving undervaluation in the communications sector, which accounts for 8.9% of today’s undervalued stocks. Like software companies, Meta plans for significant AI-related spending this year, which Sekera says has contributed to investor skepticism.
But like with the tech sector, he says Meta’s recent earnings don’t match the bearish sentiment. According to its latest earnings report, the firm ended 2025 on a strong note, with its engagement and advertising metrics bolstered by AI features. “We think that as the year continues, investors will align with our bullish view on Meta as more data points regarding the impact of the firm’s AI investments on its core ads business come to the fore,” says Morningstar’s Malik Ahmed Khan in a recent analyst note.
Sekera says he advises caution around growing concerns that AI will render software companies obsolete. He and other Morningstar analysts say AI will likely assist and not replace them. “A lot of people were concerned that with AI coding, you wouldn’t need to use their services, that you could possibly recreate these kinds of software packages on your own. But we don’t see that happening,” he explains. He thinks the performance backdrop suggests investors may be overly pessimistic.
Value-leaning sectors look expensive
As value-leaning sectors’ returns have surged this year, their valuations have climbed. As a result, the industrials sector is home to 26.85% of today’s overvalued stocks, up almost 10% since last February and currently the most of any sector.
Sekera thinks the overvaluation of the industrials sector comes from the positive market sentiment around the AI infrastructure buildout, such as the construction of data centers to house AI servers. “I would say that to some degree, the market is probably over-extrapolating how much these industrial companies will earn and for how long they will make their excess earnings before we go back to more of a normalized economic environment,” he explains.
Companies linked to the AI buildout have benefitted from the market rotation away from tech. Shares of GE Vernova GEV are up 17.26% this year, and Caterpillar CAT is up by 11.47%. GE Vernova, however, has had a 2-star rating since last February. Caterpillar dropped from a 4-star/undervalued rating in November 2025 to a 2-star/overvalued rating today.
Given the diverging returns and valuations, Sekera advises investors to play on both sides of the market, keeping one foot in the tech sector while dipping into value stocks, including food and consumer product names, which he expects will fare well in the event of another tech selloff. “It’s going to be about being able to reposition to take advantage of the volatility and positioning within sectors that we think are undervalued, while steering clear of some of those names that we think are significantly overvalued,” he says.
How should investors position themselves amid a continued rotation?
Sekera also sees opportunity in the energy sector, which is trading at a 10% discount, down from January. As of Feb. 23, the sector accounts for just 4.63% of overvalued stocks—the third lowest of any market segment.
In tech, Sekera says investors should hold steady in the face of extreme price swings: “It’s about being able to weather the volatility.”
Sekera says investors should balance their portfolios with growth stocks, including those linked to the AI buildout, and value stocks, including “safe haven” food and consumer product names. He says this provides a cushion for investors in case the market runs too hot or enters a selloff.
