Plus, our stock market outlook for the year ahead.
On this episode of The Morning Filter podcast, Dave Sekera and Susan Dziubinski preview the December inflation numbers coming out this week and cover which other economic reports to watch. They discuss valuations of the big banks reporting in the next few days—including JP Morgan JPM, Bank of America BAC and Citigroup C—and expectations for earnings. President Trump wants to increase the defense budget; tune in to find out what that may mean for popular defense stocks like Lockheed Martin LMT, Northrop Grumman NOC, and others.
Dave shares his stock market outlook for 2026, including whether investors should overweight stocks today or pull back, which parts of the market are undervalued, and what risks could contribute to market volatility this year. They wrap the episode with stock picks to buy in January that Morningstar’s analysts like.
Episode Highlights
00:00 Welcome
05:59 Watching Inflation, Retail Sales, Bank Earnings
15:39 Updates on STZ and Defense Stocks
26:07 2026 Stock Market Outlook
38:32 Stock Picks
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Susan Dziubinski: Hello, and welcome to The Morning Filter podcast. I’m Susan Dziubinski with Morningstar. Every Monday before market open, I sit down with Morningstar’s Chief US Market Strategist Dave Sekera to talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas. Before we get started this week, we have a couple of programming notes.
First, we will not be streaming a new episode of The Morning Filter next Monday, Jan. 19, due to the Martin Luther King Jr. holiday, but we’ll be back live the following Monday, which is Jan. 26, just in time for the next Fed meeting. Also, we hope you’ll join us for Morningstar’s Quarterly Outlook webinar this Thursday, Jan. 15, at 12 p.m. Eastern, 11 a.m. Central. Dave and Morningstar economist Preston Caldwell will take an in-depth tour of their outlooks for the stock market and for the economy in 2026. You can register for the webinar via the link beneath us in the show notes. And then, Dave, I saw you made Business Insider’s 2025 Oracles of Wall Street list, so I’m not going to start calling you Oracle, but I really can’t wait to hear what you have to say during the webinar this week about the year ahead.
So, let’s look at the week ahead. We have futures down this morning on news that the Department of Justice has opened a criminal investigation into Federal Reserve Chair Jerome Powell. Dave, what’s your take on whether the uncertainty around this now will be any sort of headwind for stocks?
David Sekera: No, Susan, actually, even before we get to that, I just want to show off a new coffee mug my son got for me. I thought today was going to be a pretty good, apropos day to pull this one out.
Dziubinski: What’s over your right shoulder, Dave? Would that be a cheese grater?
Sekera: For those who know, know.
Dziubinski: We are based in Chicago, so. Yes.
Sekera: Getting to the topic at hand. Honestly, I don’t know what to make of this for now. So when I’m now trying to contemplate what this may or may not mean, I just really have to start off with, fundamentally, has anything really changed here? And so for now, I would say probably not. I was already under the opinion, at least my own opinion was, I thought the Fed was likely going to be on hold until the new Fed chair was going to take over anyways. The new Fed chair will come online in May. The next meeting, then, is June. I wasn’t looking for any rate cuts before then anyway. Morningstar’s US economist, he was already calling for at least two rate cuts this year. Looking for additional rate cuts in 2027 as well. So, unless you really have a lot more rate cuts than that, I don’t think this really changes anything with the path of the economy or with the path of inflation overall. When I think about really the biggest driver in the marketplace today, artificial intelligence isn’t going to change the other path of the AI buildout boom. So, in my mind, it really doesn’t change anything fundamentally.
You noted that the markets were down this morning. Last I saw, the Dow was down 325 points this morning. Sounds like a lot, but at the end of the day, considering the Dow’s at 49,000 and change, that’s only about 0.6, seven-tenths of a percent. So, really not that big of a move at the end of the day. Bond market looked like the 10-year U.S. Treasury is only 3 basis points higher at 4.2%. Really not that much of a move. The DEXI, the dollar index, three-tenths of a percent weaker. So, at the end of the day, right now, the market’s really not off all that much. And just to put, you know, that kind of move in context, if you remember, I think it was almost about a year ago, we had DeepSeek hit the headlines. You and I came in the morning, stocks were down 5% or more premarket. We were trying to figure out what was going on to make that kind of move. So at the end of the day, it doesn’t look like the market really is too concerned about this for now.
I think more than anything else, this is just cynical Dave talking here. The media loves this kind of stuff. It’s going to give the talking heads a lot to talk about today. There’s going to be a lot of headlines concerning how this may impact Fed independence, which ultimately is going to end up depending upon the amount of substance behind the investigation, what is found, what’s not found, and whether or not there’s really any there there at the end of the day. For now, in my own mind, I’m just going to put this in the camp of yes, something to watch as it unfolds, which, I assume, if it’s like any other government activity, is probably going to be slow and probably take a long time for it to play out. So, I’m putting it in the bucket of noise for now. But, of course, something we’ll have to contemplate over time, depending on how it unfolds.
Dziubinski: An investor’s already had quite a bit on their plate looking ahead this week. We have inflation reports coming out. And, of course, earnings season kicking off. So, let’s start by talking about the CPI and PPI numbers that are both set to release this week. What are the market’s expectations in terms of inflation numbers?
Sekera: Last I saw, the consensus for CPI, both at the headline level and at the core level, was looking for a year-over-year increase of 2.7%. Essentially, that’s unchanged from last month, where headline was 2.7%, and core was 2.6%, so really, no big change expected this month from last month. Taking a look at PPI, now this one, they report on a month-over-month basis. For headline, looking at three-tenths of a percent increase, that’s unchanged from last month. The core, they’re looking for that to be 0.2% on a month-over-month basis, so up from 0.1%. But really, in my mind, I don’t think any of these numbers really indicate any change in the rate of inflation. Really not getting any better, but also really not getting any worse at this point.
Dziubinski: So then, remind us, Dave, ahead of these numbers coming out, what’s the probability of an interest rate cut at the Fed meeting in late January?
Sekera: In January, I’d say the probability right now is anywhere between slim and none. If you look at the Fed’s projections from the last meeting, I thought they were coming out with a little bit of a Goldilocks-type forecast. They were looking for inflation to continue to keep coming down. They had bumped up their higher GDP expectations. In my mind, since that meeting, there’s really been no new news out there that should cause them to change that type of outlook. I’m probably going to skip listening to the Q&A for Powell. I’ll go back, maybe read through the transcript. Maybe I’ll put the transcript in AI and look for the takeaways there. I’m sure he’s going to get a lot of questions that they’re going to try and throw at him, regarding this investigation. Of course, he’s going to be handcuffed; he’s not going to be able to say anything about that. That’ll just be a waste of time anyway. In my mind, even before coming in today, I think he probably just wants to be done at this point. I think he wants to leave with the rate of inflation, showing that it’s slowing. He wants to show that the economy was on firm footing when he left. Probably would have wanted to leave rate policy unchanged anyway. So, unless something really exogenous changes over the next couple of months, I think he just wants to leave monetary policy where it is.
Dziubinski: What else, on the economic front, are you watching this week, Dave?
Sekera: I’m going to be watching retail sales pretty closely. Now we don’t talk about retail sales all that much. It’s typically not really a market-moving event. But in my mind, with GDP so hard to read, especially like the underlying economy, kind of ex the AI buildout boom, very difficult to understand what’s really going on there. I think retail sales has an especially greater importance than usual. I believe these are the retail sales numbers for November. Headline consensus looking for four-tenths of a percent increase versus flat the prior month. Looking for core retail sales to increase 0.2% versus 0.1%. So I think if the numbers come out there, that’s going to be a pretty good indication of consumer spending going into the holiday season. And just one other thing to note: The Atlanta Fed GDPNow--again, it’s not necessarily a forecast per se--but that GDPNow print is supposed to take the economic metrics as they come out and put together that based on those metrics, like where GDP would be coming out based on those numbers. That was running for the fourth quarter, now at 5.1%. I mean, that’s. much higher numbers, certainly, than anybody would have been thinking coming into this year or into last year, much less into the quarter.
Having said all that, I just would take that headline number, or that GDP number, with a pretty large grain of salt. I think it’s going to be skewed quite a bit by the exports minus imports, part of the GDP calculation. Imports have been declining, which, in the GDP number, ends up showing a short-term boost to GDP. And, of course, we also have the AI buildout boom bolstering GDP. But really, I’m trying to make sure we understand what’s going on with really the underlying economy more than anything else. The strength there, because that’s really what we’re going to be looking for the long term. We know that the AI buildout boom is going on. But like anything else, that’s only going to last for a certain amount of time. Before all those data centers are up and running to the point that we have enough supply to meet that AI demand.
Dziubinski: And we also have earnings season kicking off this week with the big banks reporting. We’re going to hear from JPMorgan JPM, Bank of America BAC, Wells Fargo WFC, and Citigroup C, among others. What are your expectations from the big banks?
Sekera: As far as the big banks go, I think the numbers and the outlook coming out of them should look really good. I think they’re going to be very strong, very positive. No reason that they shouldn’t be able to easily beat any guidance that they had out there. I think that the outlooks that they give will be very positive, should be able to placate the market. I think every aspect of banking, when I think about it, is all going to look very strong for the fourth quarter. We’ve got this steepening yield curve that’s going to increase your net interest income margins. That yield curve we expect to continue to keep steepening over the course of the year. The economy certainly has been holding in well enough to keep defaults from rising above any kind of historical normalized levels. I think you should see pretty good demand for lending activity. Investment banking trading activity will all be relatively high in the fourth quarter. We’re seeing mergers and acquisitions increasing, so that’s going to be good for all of their fee income coming from their investment banking groups. And with markets pretty much at all-time highs, their asset management fees are also going to look pretty good. So I would say here in the short term, everything that can go right for a bank is going right for a bank.
Dziubinski: So then, let’s talk valuation, Dave, for the big banks. How do they look heading into earnings?
Sekera: Unfortunately, at this point, with everything going right and having gone right for a while now, valuations have probably crept up too high. When I look at some of the banks, you know, the big mega banks, JPMorgan, Citibank, Wells Fargo, they’re currently rated 2 stars. Bank America is a 3-star-rated stock, but it’s right at that border between 2 and 3. I would really look at that as being more a 2-star-rated stock. Even U.S. Bank USB. I mean, if you remember, that’s kind of been like our pick. Going all the way back to the fall of 2022. That was one of our picks coming out of the Silicon Valley Bank bankruptcy. That’s even a 3-star-rated stock right now. When I look across all of our regional bank coverage, again, all 2-star or 3-star-rated stocks. So, in my mind, I think the market’s already priced in all of this good news, if not more. And not pricing in a much more normalized economic cycle over the next three to five years.
Dziubinski: And we also have Taiwan Semiconductor, which is ticker TSM, reporting this week. What do you want to hear about here?
Sekera: Everyone’s going to look at this as really being an early read on artificial intelligence. Of course, their most famous client is going to be Nvidia NVDA, but they also manufacture semiconductors for AMD, QCOM, Broadcom AVGO, Apple AAPL, and so forth. So I suspect that in the fourth quarter, they’re still running hot. Their utilization is probably running as high as it can be. They’re producing everything that they can get out the door. Demand for anything AI-related and anything even tangentially related to AI still outpacing the amount of supply. So I’m expecting very strong revenue growth, high operating margins. The market--we’ll be listening for their guidance for the year. That also should be very strong. Just looking at our analyst model over the course of the weekend, our analyst is forecasting a 17% revenue growth for this year. To put that in context, that follows 32% increase this prior year, 34% the year before that. So, just some huge increases in revenue growth. Take a look at our operating margin, we’re looking for an increase there. We’re currently modeling an operating margin of 49% in 2026. That’d be up from 4.8% in 2025, up from 46% in 2024. I just would assume that with as hot as the AI-buildout boom is running, in my opinion, I’d say there’s a much higher probability of upside to our revenue forecasts and our operating margins than there is downside.
Dziubinski: So then, given that, Dave, do you think there’s opportunity in Taiwan Semiconductor ahead of earnings?
Sekera: Probably not ahead of earnings. I mean, this is a stock we have talked about a number of different times. It was a pick back on the June 20 episode of The Morning Filter. It’s up 43% since then, so that’s enough to put it into 3-star territory. The stock’s trading almost right at our fair value today, but again, I think this is one we’ll see if there’s any changes to our forecast and our fair value after earnings. My guess, probably more upside still left to come.
Dziubinski: All right. Well, let’s talk about some new research from Morningstar about stocks in the news. Last week, President Trump announced that he was seeking a $1.5 trillion defense budget for 2027. And, of course, defense stocks then rallied on that news. What’s Morningstar’s take?
Sekera: Well, first of all, with the increase, or how much he wants to increase defense spending. I think, first of all, just take that with a huge grain of salt as well. President Trump always starts with the extreme and then negotiates down from there. So, this is one where, I mean, you and I have talked about defense stocks for quite a while. We’ve been very constructive on the sector overall, talking about a lot of the different tailwinds behind it. We’d outlined several different picks in the May 19, 2025, episode. We outlined several different Trump trade stocks. We talked about how Trump negotiated a number of deals in Saudi Arabia and Europe to purchase more defense equipment. The EU also ramping up the amount of defense spending as a percent of GDP. So, again, a lot of tailwind behind defense spending overall. But unfortunately, a lot of this stuff has probably played out. So, Huntington HII, that was a pick on our podcast since July 2024. That’s now a 3-star-rated stock. Up quite a bit. In fact, it’s almost a 2-star-rated stock at this point. Lockheed Martin LMT, that was a pick on our Feb. 3, 2025, show. That one also now, pretty much right at fair value. I expect there’s going to be ongoing tailwinds here. We think the government will probably ramp up deliveries of F-35 jets over time. Northrop NOC again, a pick on the June 9 show, reiterated that pick on June 28. So again, looking for the government probably to ramp up the timing for taking delivery of the B-21 bombers. But at this point, with as much as these have run up, they’re now trading at fair value or right around that neighborhood.
Dziubinski: President Trump also issued an executive order last week prohibiting defense contractors to pay dividends or buy back shares if they fall behind on military contracts and investments in capacity. What does that mean for defense?
Sekera: And again, this just shows to some degree how we’ve talked about why I expect more volatility this year. In this case, it wasn’t volatility at the market level, but certainly volatility within the defense industry in and of itself. Because the day before, he announced he wanted a $1.5 trillion defense budget, when he made this noise, stocks all sold off. All the defense stocks had sold off a pretty good amount. I think this is just more rhetoric than it is anything else. I’m not necessarily sure how he could really implement that. I think the companies are still going to want to do what they’re going to do at the end of the day. From our perspective, there was no impact to the long-term intrinsic valuations of the companies that we cover. So at this point, I think it’s probably just mainly a bluster. But having said all of that, if the United States government is really going to increase defense spending anywhere near the amount that he’s talking about, even if it’s only half that amount. Then all of these companies would need to divert the amount of free cash flow that they’re generating toward growth capex anyway. I wouldn’t be surprised to see them actually just naturally limit the amount of dividends, certainly limit dividend growth in the short term and have to use that free cash flow, building out that new capacity. As opposed to doing share buybacks with the stocks right now anyway, trading close to fair value, I would say that’s probably the right thing to do. Because I think you’d be able to generate higher long-term gains in intrinsic valuation by increasing capacity than then by doing share buybacks.
Dziubinski: All right. So, bottom line, Dave, is there any opportunity really in defense stocks today? You made it sound like they’ve all sort of run up and they’re at their fair values, if not a little bit beyond that. Any any attractive names here?
Sekera: Unfortunately, no. Like I said, I think that they’re all pretty much 3-star-rated stocks at this point in time. But what I would say is, if you have picked up any of these in the past year and a half, two years, that we’ve been talking about the defense industry, I also wouldn’t be selling them here. When I’m thinking about what’s going on in that space, I think there’s probably more upside yet to come. So, even though they are 3 stars, they’re trading close to fair value. I still think that there’s enough tailwind here, enough probably new news that might come out that we could see some increases in cost of equity. Worst-case scenario, at fair value, you’re going to earn over the long term that cost of equity, or better. I think there’s probably more potential upside probability for seeing that defense budget still rising, not only here in the US, but globally. So again, this is one where it’s a 3-star-rated stock, but I still think it probably has further to go. I would definitely wait until if they move up into 2-star category before thinking about doing any profit-taking.
Dziubinski: All right, so a hold on the big defense companies, all right. Let’s talk about a former pick of yours Constellation Brands, which is ticker STZ, company reported strong earnings last week, and the stock was up about 5%. Morningstar maintained its $220 fair value estimate on the stock. Dave, unpack what seemed like some good news.
Sekera: Well, I think last week, when we talked about earnings coming out, probably the biggest takeaway I think you and I talked about was we noted that the market really was looking for evidence in a decline in the rate of alcohol consumption. And that consumption was going to start stabilizing, at least at current levels, if not have a forecast for starting to get a bit better. So we did get a bit of that news, taking a look at their numbers, the amount of revenue from beer only declined 1%. That’s much better than the 5% contraction in the first half. Of course, beer, their main brands being Corona and Modelo, I think that’s like 90% of their sales. So, really, that’s the biggest category to pay attention here. Operating margins held in there. I think some of the new product launches are starting to take off, certainly help offset some of the decline in beer. Taking a look at what they’re doing with their free cash flow, they do have a very large free cash flow margin. Over the last three quarters, looks like through December, they bought $824 million worth of stock back. We think that at the amount of discount the company’s trading at, that will be value-accretive for shareholders over time. We made a few adjustments here and there in our model. We lowered our revenue by 3% to account for lower wine and spirits, but yet still holding beer flat. Made a slight increase to our operating margin, but overall, at the end of the day, our earnings forecast for this year still unchanged. So, overall, no change to our intrinsic valuation after the earnings report.
Dziubinski: Now, Constellation Brands stock is up about 15% since its lows late last year. Dave, is the worst behind it, do you think? Is it still a pick?
Sekera: Hard to say. Hard to tell with alcohol consumption, really, if that trend, downward trend anyway, is behind us, or if that’s still going to continue here in the short term. But for long-term investors, we do think the stock is attractive here. The company has a wide economic moat, Medium Uncertainty, and fundamentals not getting worse at this point. Stock trades at a 33% discount to fair value has a 2.8% dividend yield. So, still a 5-star-rated stock, it still looks attractive. This is one where I think you need to have kind of that intestinal fortitude to ride this one out before it starts getting better, because again, that could be quarters out, that could be a couple of years out.
Dziubinski: All right, well, our question of the week is also about Constellation Brands. Question is from James, and James writes: “Constellation has reduced its exposure to Canopy CGC, but it strikes me that the stock would perform better without any exposure to Canopy. Why doesn’t the company say goodbye to a terrible investment?”
Sekera: I reached out to Dan Su. She’s the analyst that covers this company for us and really wanted to dial directly into that question. She noted that, first of all, Constellation has written off the majority of the investment that they’ve made in Canopy. In fact, she also noted, too, that Constellation Brands has further distanced itself from Canopy. They’ve given up their board seats there. They’ve also said they’re not going to invest any more in Canopy, at least for now. Now, they still do own a pretty decent size of the equity. We estimate that to be about 10% of Canopy through some exchangeable shares that they own. Talking to her, my understanding is that on the earnings call, management said that the stake in Canopy still at least gives them some visibility, some optionality in the cannabis market. It doesn’t indicate that they think cannabis will likely become a focus of the company in the near future, but purely anecdotally, I took a look over the weekend.
We’ve got a liquor company here in Chicago, has a number of different stores, called Binny’s. I looked up on their website. They have 208 THC SKUs in their store. So, anecdotally, I do think that THC drinks are starting to gain some interest in consumers in those areas where it is available. We’ll see what happens regarding legalization at the federal level, taxes, how distribution restrictions may or may not change. But I think that is a market you at least want to have that visibility into. So, if it looks like that does start increasing over time, Constellation Brands does have the ability to be able to get more involved in the THC drink market. So, I think it’s a good idea for them, at least, to keep that visibility. Even though they may not necessarily have a huge economic interest compared to the rest of the size of their company in it right now.
Dziubinski: All right, well, viewers and listeners, keep sending us your questions. You can reach us via our inbox, which is themorningfilter@morningstar.com. Now, I mentioned at the top of the show that Dave is putting the finishing touches on his comprehensive 2026 market outlook presentation. Again, we hope you’ll register for his webinar this coming Thursday. The registration link is in the show notes. But Dave, let’s hit some of the highlights right here, right now, starting with valuations. So, Dave, heading into the new year, was the market fairly valued? And how should investors be thinking about their allocations to stocks in general today?
Sekera: Overall, I would say you still want to be market weight at that targeted allocation based on your own portfolio dynamics coming into the year. As of Dec. 31, 2025, the broad US market was trading at a 4% discount as compared to a composite of all of our analysts’ intrinsic valuations. Now, having said that, I have to note that the undervaluation is very concentrated; mega-cap stocks just keep getting bigger and bigger. They skew the overall market valuation more and more. At this point, if I actually did our fair value calculation and I excluded Nvidia from the market, we’d only be 2% undervalued as opposed to 4% undervalued. And then from there, if I also took out Broadcom and Alphabet GOOGL, then the market was actually trading at fair value. So I really like the idea of having more of a barbell-shaped portfolio today. I think you still have to be involved in artificial intelligence and tech. I think you need to make sure you have that exposure just to retain the upside potential that’s there. You still have a lot of momentum, but I think you also then want to offset that with very high-quality, value-oriented stocks and be able to balance out the potential for elevated volatility that I expect to see here in 2026. That way, if the market ends up running too hot for too long, starts riding up to a premium, you can take profit. Most likely, the profits going to be in all of those AI and tech stocks. And then you can take that and reallocate it into value stocks, which probably will end up lagging far behind. And then, conversely, if you have a deep market selloff, I’d expect value stocks to hold out much better to the downside. And then you can use that in order to fund buying those beaten-up AI stocks once they’re down 20, 25, 30%.
Dziubinski: Let’s talk a little bit more directly about valuations across investment styles and market capitalization. How should investors be positioning themselves within, say, the style box in the new year?
Sekera: Well, first of all, by capitalization, small-cap stocks still one of the most attractive parts of the marketplace, trading at a 15% discount to our composite. But if you remember coming into 2025, we essentially said the same thing. We had noted that small-cap stocks were very undervalued. But I did couch it at that point in time, we talked about how they were probably unlikely to outperform until the second half of 2025, or even late into 2025. Reasoning for that is that typically, small-cap stocks do best when the Fed’s easing monetary policy, long-term interest rates are declining, economic growth rate has bottomed out, looks like it’s starting to accelerate. And we didn’t expect those three really to line up until later in 2025. And as such, we didn’t see small-cap stocks really outperform the broader market until August, November, and December of last year.
Now, looking forward, it’s pretty hard to have a strong view on each one of those factors. We still think, overall, the Fed is more likely to continue easing in 2026. But again, that may not be until, like the middle of this year. We still think long-term interest rates have room to come down. But when I look at the 10-year at 4.20% It’s really is having a very hard time falling into that low-4.00% range. Hasn’t been able to break through into that 3% handle yet, so again, we expect that to come down over time, but for now, not necessarily going in that direction. Economy has been extremely difficult to really kind of measure and really understand what’s going on. We talked about earlier in the show, the Fed GDPNow at 5% for the fourth quarter. Economy has been much stronger over the course of 2025 than our US economics team had been forecasting coming into the year. Large reasons for that is the AI buildout boom has been bigger than what we had originally forecast.
Having said all that, I do think that over time, small caps are more likely to continue to keep outperforming. To some degree, it’s just because that is where the most undervalued opportunities lie. Large-cap stocks are undervalued. But as we talked about, it’s very value, very oriented in just a couple of stocks. You need those individual stocks to work for large-cap stocks to work. And then same thing in growth. It’s very concentrated in just a couple of stocks. So you’re relying on those stocks to work, to be able to outperform. I’d note here growth stocks are 10% undervalued. But again, if you were to exclude Nvidia from that calculation, then they’re only 4% undervalued. And if you exclude Broadcom, then they’re actually 4% overvalued. So, just know, before you try and overweight the growth style overall, just make sure that you understand what your total exposure is, especially to those two stocks, Nvidia and Broadcom, because based on how large they are, as a percent of broad market exposure, you probably already own a lot of those stocks in those broad market ETFs or mutual funds. So I’d say, you know, before you get too deep into any one of those, just make sure you understand what the risk/reward dynamics of your overall portfolio are based on AI and tech.
Dziubinski: And then, at the sector level, Dave quickly, which sectors should investors think about overweighting or underweighting based on valuation?
Sekera: Not to get too deep in the end of one of these. Real estate still remains the most undervalued at a 12% discount. Again, I prefer avoiding urban office space, but defensive characteristic real estate looks good. Technology at 11% discount. So, again, it looks pretty good here. I’d note that in the fourth quarter, we revised our assumptions quite a bit on a lot of those stocks, most tied to the AI buildout boom. That’s what’s really driving the discount there. Energy at a 10% discount. The energy sector has really kind of continued to languish as oil prices have drifted lower. We’ll talk about what the change in leadership in Venezuela means to the energy sector on our webinar. Communications, 9% discount. Again, that’s still the same story. It just really depends on what our valuations for Alphabet and Meta META are. Those two companies now account for 72% of the sector. Excluding Meta, we do see some value in some traditional communication names as well.
And then, from the underweight perspective, consumer defensive overall still at a 9% premium. We’ve talked about this a number of different times. It’s really just concentrated in 1-star-rated Walmart WMT and Costco COST. Food stocks still look undervalued. Financials. We talked about earlier how the banks, everything that can go right is going right. But that they’re trading well intom fair value, if not into overvalued territory. So financials overall at an 8% premium, and then, lastly, industrials at a 5% premium. Anything to do with the AI buildout boom, very high valuations. So those will be stocks that whenever we see this slowing in the growth rate for data centers, those are certainly at risk. I’d much prefer being in some of the more traditional industrials, especially those in the agricultural commodity area.
Dziubinski: Well, let’s pan out and talk a little bit about 2026 more broadly. Now you say in your report, which investors can access on Morningstar.com, you said that we’re likely to experience more volatility ahead for several different reasons. Let’s get into some of those reasons. The first, of course, has to do with that theme that’s been driving so much of the market’s return, that’s artificial intelligence. So, Dave, what are the risks here that could contribute to market volatility?
Sekera: For AI stocks, any way that you want to measure the valuations there, valuations are very high. And in my mind, I think AI stocks require even greater growth to be able to support those current valuations. We’re going to take a watch of what the hyperscaler capex guidance are going to be when they start reporting at the end of this month and beginning of next month. The question is not going to be how much it’s going to grow, but is it going to grow enough to be able to satisfy the marketplace. Having said all that, when you look at our AI-based case, there’s still potential upside left to come. I would just note, if you look at like Nvidia, they’ve got a couple of new products coming out. If you listen to the CEO of the company and how he thinks Nvidia, and specifically AI overall can grow over the next five years. Our growth forecasts are still below what he’s talking about, so if it turns out having the growth trajectory that he’s looking for, there’s still more upside yet to come.
Dziubinski: We also have some political and economic risks that could lead to some stock market volatility in the coming year. Walk us through those.
Sekera: Well, of course, as we’ve already talked about with the Federal Reserve, we have a new chair that’s going to be taking the reins in May. So, we’ll see in June what impact that new chair may or may not have on monetary policy. I think we’re going to have resumption of all the trade and tariff negotiations. I think by spring you’ll start seeing a lot of the headlines, a lot of the rhetoric come out. We have the USMCA. I think we’re going to take another. The United States will take another look at that as early as June. Of course, we still have to come to more finalized negotiations with China, EU, Canada. So again, I think a lot of that, while it’s been quiet the last couple months, probably starts heating back up again. Morningstar US economist is projecting for a slowing rate of growth in the first quarter and the second quarter. So I think that slowing rate of economic growth could drive some volatility. We think inflation probably is going to run hotter than what market consensus currently is today. Our economics team thinks that some of the inflationary impacts from tariffs still have yet to roll through prices. We could see that coming through the next couple of quarters. And then, of course, we’re going to have midterm elections. I mean, the political environment is already as hot as it is, that probably gets even hotter as we start approaching the elections. You could see the Trump administration trying to push through as much of their agenda as they could over the next couple months, while they still have control of Congress. A lot of that all still have to come in the first half, next couple of quarters this year.
Dziubinski: All right. And finally, Dave, are there any risks out there that you’re sort of seeing but that you don’t think are getting maybe as much attention as they should be getting?
Sekera: I’m trying to keep as close of an eye as I can on the private credit markets. Of course, private credit has been the fastest-growing asset class in the market over the past 15 years. I think private credit, in and of itself, is already now larger than either the levered loan market or the high-yield market individually. But yet when I look at research coming out of DBRS Morningstar, which is our rating agency subsidiary, they’re noting that they’re seeing underlying fundamentals weaken in a lot of these companies. So, leverage increasing, coverage decreasing, certainly expecting more downgrades than upgrades that are requiring additional capital to come in from their PE sponsors to keep things afloat. I don’t necessarily think this is something that’s going to blow up here in the short term, but definitely keeping an eye on that. I think that is an area that, if you start seeing too many defaults, certainly could reduce risk appetite across the board. Trying to understand what’s going on with the Chinese economy is always difficult, at best. From what I’m seeing, it’s probably running at a level that’s weaker than expected. Maybe the deceleration of growth is accelerating, so I’m just going to keep an eye on that. Definitely keeping an eye on China overall. Another area that I keep an eye on are Japanese government bonds and the Japanese yen. If the weakening accelerates there, I think that would be negative systemic risk coming out of that as well.
Dziubinski: All right. Well, it sounds like you and I are going to have plenty to talk about in 2026. Let’s wrap up today’s episode of The Morning Filter with your picks this week. This week, Dave has brought us five stocks from Morningstar analyst’s first-quarter picks list. That he likes. All right, the first pick this week is SLB SLB. Give us the highlights.
Sekera: Sure. And for those of you who have a little gray hair on their head, like myself, that’s Schlumberger, renamed to just SLB. And that was a stock we actually recommended almost a year ago, on the Feb. 10, 2025, episode of The Morning Filter. You know, it’s on our best picks list for energy. I would just note that after what’s happened in Venezuela, you know, that stock did spike. It’s now moved just barely into 3-star territory from 4 stars, but it’s still at a 10% discount. It’s a company we rate with a high uncertainty, really, just due to its ties to the commodity cycle, but I’m not necessarily any more concerned about Schlumberger or SLB than the other oilfield-services companies. We rate it with a narrow economic moat, based on cost advantages and switching costs.
Dziubinski: Now, as you mentioned, SLB stock is up a bit, I think about 12% since the US action in Venezuela, so is that part of the reason you like the stock today?
Sekera: It is. When I think about what needs to happen in Venezuela, you need to rebuild that oil production infrastructure, which has been not kept up over the past 20, 25 years. So, it’s going to be very large projects, very long-lasting. I think that’s definitely driven a very positive market sentiment for oilfield services here. In the short term, I mean, all the oilfield-services names have risen, but SLB is still the most attractively valued. Halliburton, at this point is only a 5% discount. That was actually a TMF pick back on Nov. 10, 2025. Baker Hughes BKR is only at a 6% discount. That was actually a pick on the Nov. 17 episode of 2025. So, long term, our analyst does think that SLB has the most and the best oilfield-services data. So this is also one that I think that data becomes increasingly valuable as they figure out how to use artificial intelligence to be able to improve oil production and extraction.
Dziubinski: Mondelez International MDLZ is one of your stock picks this week. Give us the elevator pitch on it.
Sekera: I think Mondelez might be a new pick from our analyst team this quarter. It’s a 5-star-rated stock, trades at a 25% discount, has a 3.6% dividend yield. We rate it with a Low Uncertainty and a wide economic moat, the wide economic moat being based on cost advantages and their intangible assets.
Dziubinski: Now, it’s been a tough few years for Mondelez’s stock, so why do you think now is the time to buy?
Sekera: Well, and I would note, too, I think it’s actually been a tough couple of years for all of the food manufacturers. And to some degree, all of them have the same kind of pressures. Volumes have been under pressure at the same point in time. Costs have been rising. And they’ve had a very tough time pushing through those price increases with low- and middle-income households being under pressure for multiple years running now from inflation, and wage increases lagging inflation overall. When we look at Mondelez, our analyst notes, they have very strong brands. In fact, they noticed that 70% of its snack offerings are either holding or gaining market share. So I like to see that. With US markets at all-time highs and valuations as compared to historical norms being at all-time highs, hearing a lot of people talking about wanting to invest in emerging markets. So, I think Mondelez actually kind of gives you a very good blend, if not necessarily the best blend of having exposure to the emerging markets. When I look at these food companies, I think about 40% of their sales are in different emerging markets, whereas most US food companies probably only like 25% to 30%. So I think this is a way to get that exposure to the emerging markets, but still doing it through a US company.
Longer term, management’s looking for mid-single-digit growth. That’s better than what you’re going to see for most of the other more domestic-oriented food companies, who are only looking for low-single-digit growth. Taking a look at our model here, just looking at total revenue on the top line. So we’re looking for five-year compound annual growth of 3.8%, probably half inflation, half new products or organic growth. Looking for gradual margin to normalize over the next three years, getting back to kind of the historical average we’ve seen for the past couple of years. So between that, we’re looking for a 10% earnings growth rate between 2026 and 2029. Yet the stock is only trading at 17 times our 2026 earnings estimate.
Dziubinski: All right. Your next pick this week is a name I don’t think we’ve talked about before. If we have, it’s been a while. It’s Alliant Energy LNT. Tell us about it.
Sekera: Alliant is a 4-star-rated stock at an 8% discount, has a 3.1% dividend yield. We rate it with a Low Uncertainty and, pretty much like every other regulated entity, a narrow economic moat based on efficient scale.
Dziubinski: So now is Alliant a data center play?
Sekera: Kind of, but also not really. So Alliant is a regulated utility. It’s the parent of two other regulated utilities, Interstate Power and Light, as well as Wisconsin Power and Light. So, to some degree, every utility is a play on AI. Just taking a look at our earnings growth rate, our utilities team has said that they’re looking for the company to at least be able to meet what they think is the top line of management’s guidance of 5% to 7% growth is going to be over 2027. But then they’re looking for accelerating growth beyond 2027. So the company has a 13-point, $4 billion, four-year capital investment plan. That is up 24% from their last four-year plan. And to some degree, a lot of that is due to data center construction. They’ve got a number of different projects out there that they’re working on. Those will be coming online over the next couple years. Beyond 2028, there’s at least two to four different projects, I believe that they have planned as well. Overall, we think this plan is also supported by very constructive regulation across its operating subsidiary. So, looks pretty good from a number of different markets, but not necessarily concentrated on just being an AI play.
Dziubinski: Your next pick this week is Omnicom Group OMC. Give us the key metrics on this one.
Sekera: Sure. Omnicom is a 4-star-rated stock, trades at a 31% discount, has a 3.7% dividend yield. We rate the company with a High Uncertainty Rating. We also rate it with a narrow economic moat based on intangible assets.
Dziubinski: The stock’s down more than 20% from its 2024 highs. What’s been going on at the company and why do you like the stock today?
Sekera: For those of you that don’t know, Omnicom is one of the largest global advertising agencies. They provide both traditional as well as digital advertising services. So, just what you’d expect: creative design, market research, data analytics, ad placements, public relations, all of that kind of stuff. But to some degree, this company, I think, and really all the other ad companies have all been lumped into this broad market category, where the market is paying lower valuations because it is increasingly difficult to discern how artificial intelligence may or may not disrupt the business model over time. Specifically, you can see how AI may disrupt kind of the creative and the advertising production part of their business. I think this is probably part of the reason that the company merged with Interpublic, IPG, which was another global ad agency.
At the end of the day, we still think there is a need for advertising companies. We still think that people that need to advertise do need assistance developing really that omnichannel approach to advertising and marketing. With what everything is going on in both traditional and digital space, with artificial intelligence now coming online, just has become increasingly more and more complex. I think this is probably an industry that you need enough scale to be able to compete. I think that’s why we’re seeing consolidation in this industry. And, in fact, I wouldn’t be surprised to see even more consolidation. They now call this sector the Big Five, with the Big Five advertising. It was the Big Six before the merger between Omnicom and IPG. Omnicom, taking a look at their forecast, probably pretty conservative. Five-year revenue growth, compound annual growth rate only 2.1%. Margins have been under pressure. We’d be looking for that margin pressure to alleviate. But we’re not looking for those margins to get back to pre-AI margins. We are looking for that permanent shift lower in operating margins. We’re only looking for an average of 10% between 2022 and 2024. It was 13.7%. So overall, we’re only looking for earnings growth to average 8.3% from 2026 to 2029, but it’s only trading at 15.5 our 2026 earnings estimate.
Dziubinski: Alright, then your final stock pick this week is Albemarle ALB. Walk us through the highlights.
Sekera: Albemarle is a 4-star-rated stock with a 19% discount, 1% dividend yield. Now we do rate this one with Very High as far as the Uncertainty level. So, this is one that I think is probably best suited for a more speculative part of your investment portfolio. And we rate the company with a narrow economic moat based on its cost advantages.
Dziubinski: Now, as you suggested, Albemarle has been an exceptionally volatile stock. So given that, why is it a pick, Dave?
Sekera: Overall, Albemarle has long been our go-to stock pick to play the long-term demand growth dynamics we see for lithium. And the company specifically owns two of the lowest-cost, highest-quality lithium production sites. Our original thesis for lithium, that we started with a couple of years ago, was that by 2030, two-thirds of all new global auto production would be electrified, whether that’s a hybrid or battery electric vehicle. And when you look at the amount of lithium that’s being produced, the amount of lithium that’s scheduled to come online over the next couple of years, we think lithium will be undersupplied as compared to demand, and that’s going to keep costs above the marginal cost of production. And being a low-cost provider, this company was well positioned. Originally, lithium prices soared in 2021 and 2022, and, in fact, Albrmarle too far. It was actually a 2-star-rated stock back in November 2021, and then it came just crashing down as the rate of increase in demand for EV slowed, new sources came online, and lithium prices really got hit for several years running.
We talked about this in November 2023. It was a pick on The Morning Filter. I was probably too early to that call. Lithium and Albemarle continued to fall in the months thereafter. However, since then, our long-term thesis on lithium, the supply and demand has still held true over time. So at this point, it looks like lithium prices have bottomed out last August. We lived through the downside. At this point, the stock is actually slightly up from when we first recommended it in November 2023. We actually reiterated this as a pick on the Aug. 25 episode of The Morning Filter. So at this point, it just appears to us lithium prices have fallen far enough that a lot of the new projects that were scheduled to come online have been shelved. Prices haven’t come up enough yet to start bringing those projects to fruition yet. We’re starting to see now more demand come from utility battery storage from data center buildouts. So I think that’s going to be a good tailwind in the short to medium term as well. So, overall, as prices recover from the bottoms, we think that Albemarle is just very well poised to be able to have very strong profit growth over the next couple of years.
Dziubinski: All right. Well, thank you for your time this week, Dave. Viewers and listeners who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. We hope you’ll join us on Monday, Jan. 26 for our next episode of The Morning Filter podcast. We’ll be streaming at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Take care.