Investors continue to enjoy gains as markets move higher, with unfashionable countries and sectors outperforming and highly speculative assets like crypto falling sharply. The contrarian exposures in Morningstar portfolios have boosted client returns, with large gains in Brazil and Korea while Consumer Staples and UK equities also performed well.

What makes this year different from 2025 is how AI is impacting markets. A sell off in large AI hyperscalers has spread to software companies and more recently to highly profitable service industries. Behind the plunge are two fears about Artificial Intelligence, sparked by releases of better AI tools.

The first fear is that really big AI investments simply won’t pay off, as ever larger sums of capital are committed. Current estimates are close to $700bn just from Alphabet, Microsoft, Meta and Amazon. We do expect a sharp rise in AI related revenues from this spend, but there is considerable uncertainty and a risk that companies fail to execute.

The second fear is that AI will eliminate the competitive edge and profitability of service companies, especially highly valued oligopolies, if users can access new tools and data directly. So what should investors make of this?

Prior to this selloff, our view was that valuation levels of US technology stocks were unattractive versus most other industries and comparables outside the US, because share prices had outpaced their earnings growth. For these reasons, we held less US IT stock exposure than usual. Where we did own technology stocks, our positions were biased to hardware beneficiaries, such as Samsung and SK Hynix, whose earnings are directly linked to the increased AI spending, and firms like Google and Meta, which are using AI to enhance ad revenue generation. We also saw better value in dominant IT franchises in China.

So far in 2026 we have seen technology share prices fall while other markets rally. Could this now be a buying opportunity? For us, the real question is whether AI spend and its impact on competition will lead to much lower or less certain profitability and a lower “fair value”.

To answer that question we use the Morningstar moat framework to assess how AI might impact businesses. The moat concept popularised by Warren Buffett applies the idea that firms can erect competitive barriers that enhance profitability and growth by making it much harder for others to take their clients. Companies with “wide moats” are worth more than those with “narrow” or “no moats”. Morningstar Equity Research analysts base their moat ratings on 5 factors: Switching Costs; Network Effects; Intangible Assets; Cost Advantages; and Efficient Scale. Overall the broader sell-off looks overdone for companies with strong competitive advantages.

There is more of a question about the growing AI spend, its scope to push up costs and how revenues can rise enough whether by raising prices, taking market share or creating new markets. Faced with this uncertainty, we still favour other opportunities given current share prices.

For example, emerging market equities and bonds still offer better risk adjusted potential returns than developed countries, with the exception of the UK. Many emerging market countries no longer look like poorly managed, heavily indebted and politically volatile versions of developed countries. Instead, they have demonstrated greater fiscal discipline in terms of deficits and balance sheets. Their central banks have done a better job in containing inflationary pressures. Policymaking has been more predictable and transparent than the US, in many cases. There remain unique risks but at today’s prices investors are well compensated. Meanwhile global investors have large US asset exposures and are actively seeking to diversify into other sectors, currencies and geographies.

Disruption is certainly real and it includes not just the impact of AI. It also extends to re-examining the difference between emerging and developed countries and how much to hold in portfolios. We remain overweight in emerging market assets.

Get Morningstar’s insights in your inbox