Stock Sector Outlooks: Morningstar’s Top Q4 Picks Across the Market

The market heads into the final months of 2026 after stocks posted small gains in the third quarter, with the Mag 7 cushioning against the wobbling artificial intelligence trade, rising oil prices, and higher interest rates. For the year to date, though, energy stocks lead by a wide margin, since the Iran war has driven fuel prices higher.

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 struggled in the third quarter, leaving much of the sector undervalued. Over half of the names in Morningstar’s coverage of the group trade in 4- or 5-star territory, according to senior equity analyst Seth Goldstein. He digs into what’s been driving the trends and names undervalued top picks, including Albemarle ALB and Solstice Advanced Materials SOLS.

Communication Services

Michael Hodel, sector director of communication services equity research, says the market is coming around to the view that Meta’s AI investments will prove neutral or even valuable, allowing the wide-moat social media advertising business to shine. AI is helping to push both ad volumes and pricing higher, Hodel says, but owing to its recent rally, Meta shares are looking fairly valued. His team prefers Google parent company Alphabet GOOG/GOOGL.

And on the telecom side, things look attractive. Many firms have made significant progress moving to streaming from cable, which Hodel says the market has overlooked. Top picks include Comcast CMCSA and Disney DIS.

Consumer Defensives

Defensive consumer stocks trailed the market in the quarter. Sector director for consumer cyclicals equity research Erin Lash sees attractive long-term potential in the sector, with roughly 47% of companies across Morningstar’s coverage for the sector carrying 4- or 5-star ratings. Lash says alcoholic beverages and consumer packaged goods are the most compelling opportunities. Even as input costs rise, firms can selectively raise prices for relevant brands that deliver unique consumer value. Among the top picks highlighted are Kraft Heinz KHC and Hershey HSY.

Consumer Cyclicals

Consumer cyclicals also lost ground in the quarter. As many consumers continue to feel the pinch of inflation and rising gas prices, the sector is down roughly 6% for the past 12 months while the US stock market ended the quarter up over 15%. Across Morningstar’s sector coverage, nearly 70% of all covered consumer cyclicals names trade in four- or five-star undervalued territory. Lash says there are particularly enticing opportunities in apparel, as well as travel and leisure. She shines the spotlight on Capri Holdings CPRI, Bath & Body Works BBWI, and Lululemon LULU.

Energy

Energy stocks are up this year. The Morningstar US Energy Index was the best-performing sector index in the third quarter; a shift from the previous quarter. Climbing oil prices drove the latest rally as war tensions flared between the United States and Iran. Morningstar analysts say the energy sector looks slightly overvalued, though gas names look cheap. They say growing demand from LNG and data centers will push prices higher and continue to incentivize drilling. Sector director Joshua Aguilar explains why the team’s current top picks include Antero AR and Baker Hughes BKR.

Financial Services

Sean Dunlop, sector director of financial services equity research, says that financial services’ underperformance can be attributed to AI-disruption fears and rising interest rates. As a tough year continues for the sector, Morningstar analysts don’t see the trend reversing anytime soon. They rate the sector as overvalued.

That said, Dunlop explains why the market has likely overreacted in a few key cases. LPL Financial LPLA, Fiserv FISV, and Nu Holdings NU are among Morningstar’s favored picks in the sector.

Healthcare

Healthcare stocks beat the market in the third quarter as investors sought downstream AI beneficiaries and noted impressive clinical data for breakthrough cancer therapies. Director of healthcare equity research Karen Andersen sees challenges remaining for healthcare plans and some life science names, but Morningstar expects innovation-fueled upside in some areas of biopharma. Andersen notes continued volatility in the sector and uncertainty in areas like healthcare plans, but she sees opportunity in GE Healthcare GEHC and BioMarin Pharmaceutical BMRN.

Industrials

The industrials sector has risen on themes like reshoring, rising defense spending, and areas of exposure to the AI buildout. While Morningstar sees the sector as fairly valued overall, analysts see compelling opportunities, particularly within aerospace and defense, business services, and construction. Director of equity research Suryansh Sharma’s latest top picks include Vontier VNT and CarMax KMX.

Real Estate

Real estate stocks fell in the quarter, and they’re lagging the broader market over the last 12 months. The sector’s performance has been negatively correlated with interest-rate changes over the past few years. And with 10-year yields at their highest in decades, these names have suffered.

That said, Morningstar senior equity analyst Kevin Brown says real estate fundamentals were strong across the board in the quarter. Over half of the real estate stocks on Morningstar’s coverage list are undervalued, with the remaining seen as fairly valued. Kilroy Realty KRC and Invitation Homes INVH are among the favored stocks.

Technology

After tech stocks surged in June, driven by semiconductor and AI-related names, returns in the sector have cooled somewhat. Tech stocks are still ahead of the broader market for the third quarter and the trailing 12 months. Director of equity research Eric Compton says that the AI buildout remains fundamentally intact, and unit economics suggest healthy returns on investment. Morningstar sees many stocks in the sector as overvalued, especially within cybersecurity. Compton and team see attractive buys in Alphabet and Broadcom AVGO.

Utilities

The unprecedented rally in utilities stocks over the past few years is now behind us. After peaking in February, the group has fallen from the best-performing sector to the worst. Senior equity analysts Travis Miller and Andrew Bischof say rising interest rates and data center regulatory hurdles are behind this. While historically low dividend yields (relative to Treasury yields) are a risk, valuations for utilities have gotten more reasonable. Morningstar analysts’ top picks include Alliant Energy LNT and Edison International EIX.