Key takeaways
- The US stock market is trading at 5% discount to a composite of our valuations.
- Valuation dislocation across styles narrowed, with growth and value both at 7% discounts.
- April’s market leadership was highly concentrated, driven mainly by artificial intelligence and mega-cap winners.
- AI remains the dominant earnings and investment theme.
As of April 30, 2026, the US equity market was trading at a 5% discount to a composite of our fair value estimates of the over 700 stocks we cover that trade on US exchanges. Our price/fair value metric fell to as low as 0.88 at the end of March, before the April market rally brought it back up to 0.95.
Barbell portfolio reallocation update
In our 2026 Market Outlook, we warned that several key emerging risks could lead to this year being more volatile than last. In order to take advantage of this volatility, we recommended a barbell-shaped portfolio. One half of the barbell is invested in high-quality, value stocks (especially undervalued energy stocks), with the other half of the barbell being invested in growth stocks (especially undervalued technology and AI).
On the March 30 episode of The Morning Filter podcast, we recommended that it was time to start harvesting profits in the value category, specifically energy stocks, and reallocate those proceeds into the growth category, specifically into technology and AI stocks. At that point, the Morningstar US Value Index had risen 1% year to date, and the Morningstar US Energy Index had risen 41%. Comparatively, the Morningstar US Growth Index had dropped over 9%, and the Morningstar US Technology Index had fallen over 11%.
Since we made that reallocation recommendation, growth stocks have staged a strong comeback, rising 12% in April, and technology stocks surged over 17%. Value stocks lagged in April, only rising 3%, and energy stocks retreated 5%.
Following these returns and incorporating our fair value changes over the course of April, valuations have become much less skewed. Both growth and value stocks are trading at a 7% discount to our valuations, whereas core stocks remain much closer to fair value.
By capitalization, small-cap stocks remain the most undervalued at an 18% discount, while both large- and mid-cap stocks are at a 4% discount.
Return dispersion across sectors
As we detailed in our March 2026 outlook, the relatively narrow trading range at the broad index level has masked significant sector‑level rotation occurring beneath the surface.
The communications sector led the market higher in April, surging over 18%. Almost the entire gain was driven by 4-star-rated Alphabet GOOGL.
The technology sector was close behind, surging over 17% in April. Gains across the technology sector were much more broadly spread across the sector, yet the greatest individual contributors included AI-driven stocks such as Nvidia NVDA, Broadcom AVGO, and Advanced Micro Devices AMD.
The consumer cyclical sector also posted a double-digit gain in April, yet almost the entire return was driven by Amazon.com AMZN, which started the month as a 4-star-rated stock. Excluding Amazon, much of the sector remained moribund.
Only two sectors registered losses in April. Energy fell approximately 3% as oil prices subsided and healthcare posted a slight loss. While 2-star-rated Johnson & Johnson JNJ was the single greatest detractor to returns, losses were widespread across the sector.
Looking forward, technology remains most undervalued
Even after the strong returns in April, the technology sector remains the most undervalued, trading at an 11% discount to fair value. While the technology sector contains some of the most undervalued mega-cap stocks tied to artificial intelligence, such as Nvidia and Broadcom, it also contains some of the stocks we think are most overvalued in today’s market, such as Ciena CIEN and Western Digital WDC.
The healthcare sector is the second most undervalued at a 7% discount. The area that we see the most opportunity is in medical devices, diagnostics, and instruments such as Danaher DHR, Medtronic MDT, and Abbott ABT.
At a 5% discount, financial services and real estate tied for the third most undervalued sector. The financial-services sector was the second most overvalued coming into the year and is the second worst performing sector year to date. Real estate started the year as the most undervalued sector and has performed admirably, rising over 10% year to date. By market capitalization, the most attractive segment in real estate is the cellphone tower REITs, such as American Tower AMT and Crown Castle CCI, which remain out of favor.
On the flip side of the coin, the consumer defensive sector is the most overvalued at a 19% premium. Yet, this premium is heavily skewed by 1-star-rated mega-cap stocks Walmart WMT and Costco COST. Excluding these from our valuation, the sector valuation is much closer to being fairly valued. After rallying over 14% year to date, the basic materials sector is the next most overvalued at a 12% premium. Similarly, after rallying almost 17% this year on the strength of supplying the AI-buildout boom, the industrials sector is 8% overvalued.
Earnings season takeaway: It’s still all about AI
The AI-buildout boom remains full speed ahead.
This earnings season, expectations for companies most closely tied to the AI-buildout boom were high, and these companies did not disappoint.
Generally, everyone beat expectations both on the top line as well as the bottom line, and in many cases by a lot. Almost all these companies boosted their guidance to some degree, and many increased their guidance for the amount they plan to spend on capital expenditures.
The race to build out ever-increasing generative capacity is the modern-day version of the gold rush. Each of these companies is in a race to build out capacity faster than competitors; each wants to capture a first-mover advantage, as their biggest concern is that laggards will end up in the scrap heap of history.
Looking forward, investors need to be judicious in their decisions about which AI stocks to invest in. On the one hand, we see a number of undervalued opportunities among those companies that are the leaders in their respective AI buildout and use cases. Stocks such as wide-moat-rated Nvidia, Alphabet, and Broadcom trade at enough margin of safety to be rated 4-stars.
Yet, we also see areas that we think are overextended. For example, some of the most overvalued stocks we cover are technology companies whose hardware products are commodity-oriented and do not have an economic moat. The huge demand from the AI-buildout boom has led to an undersupply of these products in the short term, but once the excess demand abates and new supply comes online, we expect the high prices they can charge to plummet back to Earth, and the record operating margins they earn today will quickly contract.
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