Stock Sector Outlooks: Morningstar’s Top Q3 Picks Across the Market

The stock market heads into the second half of 2026 having staged a strong rebound from the Iran-war-induced swoon, led by technology stocks. However, tech is not at the top of the leaderboard for year-to-date returns. To the likely surprise of many investors, that prize goes to industrials. Meanwhile, energy stocks fell to the bottom of the pack after riding the oil price surge during the first quarter.

What’s next? Which sectors look cheap, and which look expensive? And where do Morningstar analysts see the best opportunities? We’ve collected the outlooks and top picks for each sector from across Morningstar’s US equity research team.

Basic Materials

Basic materials stocks struggled in the second quarter, managing only small gains after a strong performance in the first. However, most of the sector is now fairly valued or overvalued, according to senior equity strategist Seth Goldstein. He digs into recent performance and highlights top basic materials picks that include Linde LIN and Corteva CTVA.

Communication Services

Michael Hodel, sector director of communication services equity research, notes that much of the attention in the second quarter was on a stock that is ostensibly an aerospace company: SpaceX SPCX. Thanks to its Starlink satellite communications business, investors are increasingly worried about the outlook for terrestrial communications companies like Comcast CMCSA and Charter CHTR. Meanwhile, Meta Platforms META and Alphabet GOOGL have dictated sector returns.

Hodel explains why Comcast, Omnicon OMC, and Disney are DIS among Morningstar’s favored stocks in the sector.

Consumer Defensives

Defensive consumer stocks were the third-worst sector in the second quarter, barely eking out gains. However, for long-term investors looking to put money to work, sector director of consumer equity research Erin Lash notes that over half the stocks covered by Morningstar are now seen as undervalued. Among the stocks highlighted by Lash as top picks are Clorox CLX and Kraft Heinz KHC.

Consumer Cyclicals

Consumer cyclicals fared better in the second quarter but still lagged the broader market. With many consumers feeling the pinch of inflation and rising gas prices, the sector has underperformed for the past 12 months. More than half the stocks on Morningstar’s coverage list are undervalued. Lash says the apparel and travel subsectors look particularly attractive. She shines the spotlight on Nike NKE, Lululemon LULU, and Gildan GIL.

Energy

It’s certainly been a rollercoaster for energy stocks this year. The sector was the top performer in the first quarter and fell to the bottom in the second. The catalyst, of course, was the surge in oil prices due to the Iran war, and then the subsequent plunge when a peace agreement (albeit a shaky one) was reached.

Much will depend on how the back-and-forth between the United States and Iran plays out, but Joshua Aguilar, who heads energy sector coverage, says that for now, the sector looks fairly valued. However, the potential for oversupply could create opportunities. Aguilar has Devon Energy DVN and Antero Resources AR among his top picks.

Financial Services

Financial stocks came up shy of the overall market in the second quarter, and they’re the second-worst-performing group over the past year. Morningstar’s Sean Dunlop blames a combination of worries about AI disruption of financial services and cracks in private credit. While he says there are some legitimate worries for some individual companies, he sees the damage to the sector as indiscriminate. Against this backdrop, Charles Schwab SCHW and Bank of America BAC are among the team’s favored stocks.

Healthcare

Healthcare stocks posted mixed performance in the second quarter and tied with financials in underperforming the overall market. But over the past year, the sector has put up competitive returns amid some clarity on government policy fronts.

Director Karen Andersen says challenges remain for healthcare plan companies and some life science stocks, but biopharma names present solid opportunities. Andersen highlights Medline MDLN and GE Healthcare GEHC among the sector’s top picks.

Industrials

It’s been a remarkable run for industrial stocks, as investors have favored both hard-asset companies and names associated with the artificial intelligence infrastructure buildout. But with the sector up more than 35% over the past year, Morningstar analysts see the group as fully valued, according to director Suryansh Sharma. Still, there are opportunities across the sector, particularly in farm machinery, aerospace and defense, and construction. CarMax KMX and Lennar LEN are among the favored stocks.

Real Estate

Real estate stocks have had a decent run in 2026, with broad-based positive returns across the sector. Still, the group remains well behind the overall market over the last 12 months. Just shy of 60% of the real estate stocks on Morningstar’s coverage list are deemed undervalued, and another third are seen as fairly valued. Senior equity analyst Kevin Brown highlights Kilroy Realty KRC and others as opportunities for investors.

Technology

Yes, there have been massive gains in some corners of the technology sector, but software has been bloodied, and some of the stock market’s biggest names are lagging. Senior equity analyst Dan Romanoff says that against this backdrop, hardware and semis are seen as slightly overvalued and software as undervalued. Still, even in industries like semis, Morningstar analysts see companies that are attractive buys. That includes sector giants Nvidia NVDA and Microsoft MSFT.

Utilities

Utility stocks have been on a three-year rally, with some staging big gains on surging demand for electricity from data centers. However, the sector’s move higher lost steam in the second quarter. Still, Morningstar analysts are bullish on data energy demand growth in the years ahead and expect continued infrastructure investment. Senior equity analysts Travis Miller and Andrew Bischof point to DTE Energy DTE and Edison International EIX as among the most appealing names in the group.