What’s Ahead for Stocks this Quarter—and Where to Invest

[music] [music] [music] >> Hello, I'm Susan Jabinski. Welcome to a bonus episode of The Morning Filter podcast. As regular viewers and listeners know, we're dropping some bonus episodes of the podcast covering topics that you've told us you want to hear more about. If you have an idea for a bonus episode, send it to us via our email address, which is themorningfilter@morningstar.com. Today's bonus episode is a replay of Morningstar's fourth quarter 2026 stock market outlook webinar. The webinar features The Morning Filter co-host Dave Sekera and Morningstar's chief economist Preston Caldwell. Dave and Preston share their outlooks for stocks, bonds, inflation, interest rates, and the economy for the remainder of the year. This presentation was taped on October 13th 2026. >> So, as always, I'm just going to start off with a broad discussion of the US equity market evaluation. We'll dive into sector valuations and some top picks and then discuss evaluation by economic moat. I'll turn it over to Preston, who will then review his US economic outlook. We'll do a quick overview of mega caps and fixed income and take as many questions as we can. So, let's just get into where we are today. So, at the end of the third quarter on September 30th, using our valuations, the US equity market was trading at a price to fair value of 0.9. So, essentially, that means the market was trading at a 10% discount to a composite of our fair value estimates. Now, for those of you that aren't familiar with our price to fair value metric, essentially, what it is is we take a composite of the intrinsic valuation on all of the stocks that are covered by our equity analyst team. That's over 700 stocks here in the US, over 8 1,600 stocks, you know, globally. And we compare that to a composite of the market valuation of where they're actually trading in the marketplace. So, truly a bottom-up view of what valuations should be as opposed to a lot of other strategists that usually do much more of a top-down approach. It always seems like their goal-seeking. They come up with some sort of S&P 500 earnings estimates, slap some sort of, you know, multiple on top of that, and then tell you, you know, what the market is, you know, discounted or undervalued at as opposed to really looking at it on a stock-by-stock, on a market capitalization basis. Now, the thing that I see today that's a lot different than what we've talked about in the past is just how much more individual stock selection is becoming increasingly important. So, when we did our valuations this quarter, I noted that the discount that the market's trading at overall is really heavily skewed by what I'm now calling the undervalued seven. So, that's Nvidia, Broadcom Microsoft Alphabet Tesla Amazon, and Meta. So, if I actually were to remove those seven stocks from our valuation, the rest of the market composite is trading pretty close to fair value at uh today's levels. And then I also want to note here that again we're having another shift in our valuations towards a barbell-shaped portfolio, slightly over weighting value, slightly over weighting growth, and in order to pay for those over weights, you know, being under weight core. And we'll get into that a little bit more as we talk about how the skew from the undervalued seven, you know, impacts how to be able to invest in those different categories. So, overall at that 10% discount, I still think as an investor you should be a market weight equities. I'm not necessarily ready to go to an over weight yet. A lot of times when you get to about this amount of discount or slightly more is a good time to start over weighting. But when I look at the macro dynamics out there, and we've talked about this on the podcast, and I believe the last, you know, webinar as well, macro-dynamics are really getting pretty ugly. They're a lot more challenging, you know, for the marketplace, you know, going forward. We've recently had the Fed already tighten monetary policy with their first hike. Preston will give his opinion, but I think we're looking for another rate hike by the end of the year. We've had long-term interest rates rising across the board, both in the US as well as pretty much all the other developed markets. US Treasury, the 10-year, for example, has gone up over 100 basis points year-to-date. We're at 5 and 1/4 right now. Looks like we're getting a little bit of a pause here, but we'll see whether or not that trend continues here in the short term before we think long-term rates start coming back down. Yeah, inflation still elevated, not necessarily rising at, you know, scary rates at this point in time, but certainly higher than you or I or the Fed, you know, certainly would prefer. Yeah, the US economy is reliant on the AI build-out. We're still expecting that AI build-out to grow even more into 2027, but of course, if that were not to come to fruition, that would be a big risk for a lot of those AI stocks. When I look at a lot of the international economies, whether it's the EU, Japan, China, I would note that those economies are pretty stagnant at best. Economies like China, I don't think are anywhere near as strong as what the reported metrics are. And we've noted this in the past webinar, too, as well. A lot of cracks in the private credit markets, and we'll talk about that when we talk about our fixed income outlook. Just a quick review of how the market performed past quarter, up about 1.7%. Really supported by the value sector, which was really all about healthcare and energy stocks. Yeah, healthcare and energy both had pretty strong gains. That was enough to offset any other losses within the sector. Uh within the core stock category, a slight loss there. We had pretty good gains in Microsoft, Apple, Meta, and Amazon, but just the sheer number of stocks in that category that declined was more than enough to offset those gains. And then of course the loss in the growth category, generally I would say is really driven by a lot of those semi equipment manufacturers that we've talked about in the past. A lot of those commodity oriented tech hardware stocks that we had noted really had been getting way too far into overvalued territory by the end of last June. Big correction in a lot of those names and that's really what drove, you know, the losses there. And then of course, you know, just looking at the returns by capitalization, you know, large cap stocks, specifically those that are leaders in AI that are doing really the most of the build up boom, you know, had performed well and of course we had rising oil prices lifting, you know, the largest of the energy stocks like Exxon Mobil. So that was enough to put the large cap category in the positive territory as far as, you know, the mid cap and small cap saw losses both of those. Specifically, I'd say in the small cap space, I think a lot of fear about how rising interest rates, short-term interest rates specifically, with the Fed rising Fed funds rates could impair a lot of those companies earnings in the short term. A lot of those companies do have, you know, floating rate debt so they will be paying higher interest costs, you know, over the next couple of quarters. You know, year-to-date been a pretty good year. I mean, up 12 and a half percent. I don't think anyone can complain about that compared to how strong of a market we've had, you know, the past couple of years. Now, the numbers here may look a little awkward compared to the value, the core, and the growth categories. So I just have to remind people in the index calculations that calculations for the broad market is unconstrained and so therefore the full market capitalization increases of all of those mega cap stocks that went up is reflected in the 12 and a half percent. But then within the individual categories, value, core, and growth, those are those are constrained indices such the largest of the mega cap stocks are only allowed to be up to a certain percentage of that overall category. So, that's why you see the returns there being lower than what they were for, you know, the overall market. You know, value stocks, of course, benefited from a rotation into several different defensive sectors. You know, within the core category, just like those handful of tech stocks we already talked about drove about 80%, you know, of the return there, you know, year-to-date. Then, within the growth category, the tech sector, you know, larger gains than the overall sector with like Nvidia, AMD, SanDisk. I mean, those three stocks accounted for about 60% of the category gain, you know, in and of themselves. And of course, large-cap stocks still being the primary beneficiary of the AI build-out boom. What I wanted to show in this chart is how using Morningstar's style box and our valuations have helped perform or helped investors, you know, really be able to position their portfolio over the course of the year and make reallocations into those parts of the market that we think are most undervalued. So, while we've had a market-weight opinion on stocks overall as a percentage of what your target allocation is, the beginning of the year we had started with a barbell-shaped portfolio, recommending to being overweight value, overweight growth, underweight core. We had the big market hit in February and March to the point that value stocks, I think not only held their value, some of the value stocks actually performed, you know, pretty well. So, we thought it was time to take the profits in the value category and do an even further overweight into the growth category, which became by far the most undervalued part of the market, and then move from an underweight to a market weight in core. Now, by June, we saw the market, you know, move pretty substantially up off of those lows, you know, getting to the point where it looked like a lot of those category weightings were really pretty close to the overall market. So, then we were moving back towards a balanced portfolio across each of the three categories. And today, looking at back to the barbell, back to overweight value, overweight growth, underweight core, you know, based on the valuation. So again, I think this is a good way to help investors, you know, be able to identify those areas of the marketplace that are undervalued, steer clear of some of those that are more overvalued, you know, to be able to make those reallocations in your portfolio allocation. Just taking a quick look at, you know, how returns have performed, you know, here in the third quarter. Of course, energy's been a very volatile sector, you know, skyrocketing after the first, you know, conflict with Iran started, then oil prices moderated, those came back down, oil price is back up again. So energy, you know, was the, you know, top-performing sector this past quarter. Taking a look at tech, you know, the second best-performing, you know, I would say almost 60% of that tech rebound was really just coming from a big bounce in Microsoft stock. That, of course, is a stock that we've been, you know, very constructive on pretty much for the entire year. You know, it got pulled down with the SAS-pocalypse, you know, the sell-off in all of the software stocks that we didn't think was warranted, and that one has actually been moving up, you know, pretty nicely ever since. Within the sector for healthcare, pretty widespread gains, you know, overall, not necessarily one individual stock or another that really accounted for, you know, all of the returns. With interest rates rising, you know, the utility sector got hammered, so that was the worst-performing sector. You know, the rising interest rates, you know, also pressured, you know, the real estate sector. And then I just note within the industrial sector, a lot of those industrial stocks that are considered to be second-derivative AI plays were the ones that really ended up pulling the sector down, you know, over the quarter. Year-to-date, you know, energy, of course, we had talked about the beginning of the year as being one of the most undervalued sectors within our 2026 outlook. Certainly a huge performer, you know, year-to-date both on the course of valuation and higher oil prices. You know, tech stocks being just the biggest beneficiary of the AI build-up boom, still a very strong performance there. And really even with the pullback in industrials last quarter, you know, some of those second derivative plays on AI still have led to very strong gains in the industrial sector, you know, overall. You know, rounding that out, you know, I'd just say healthcare also was an undervalued sector that's just seen good broad-based gains, you know, across the entire board. You know, looking at some of the losers here, you know, consumers, you know, a lot of the concerns that have, you know, really risen with inflation, wages, you know, lagging. You know, changes in how consumers are spending their money, you know, hit the consumer cyclical sector. And then lastly, you know, rising rates have hit utilities and uh specifically within the financial services sector, a lot of the non-bank financials are the ones that got hit the hardest year-to-date. Taking a look at the contributors, you know, for the third quarter. Yeah, and again, these top 10 contributors actually had higher returns overall than the overall index return. And I think that's just one of those, you know, indicators that show how poor the market's breadth is and just how concentrated, you know, returns have been specifically in a lot of these, you know, AI leaders. Now, I'd say this quarter it's a little bit more diverse as far as, you know, who were some of these top 10 contributors. You know, last quarter it was really purely all of the AI plays. You know, at this point we have a couple of those, you know, energy names that kind of rounded out as well as a couple of other, you know, non-AI plays like a CrowdStrike or a Thermo Fisher. For your review, you know, just looking at, you know, what our ratings had been over the past quarter to where they were quarter end with the performance of the stock compared to our valuations. And then looking, you know, to the downside, the third quarter detractors, you know, these are the ones that pulled down, you know, the overall index the most, you know, AMAT, KLAC, you know, Lam, Intel, you know, all of those had, you know, big retreats after the run-up, you know, in the first half of the year. You know, a lot of those being companies that really got pulled up with that whole commodity, you know, AI tech build-out boom, you know. I It's hard to even really kind of describe what that little mini bubble was, you know, but it pulled up, you know, all of these stocks. And, you know, we just saw all of them roll over really in June. Most of those were pretty much, you know, one-star rated stocks. And again, you can see what our ratings were here at the end of June, you know, pretty much all of these being, you know, one- and two-star rated stocks. You know, a couple of stocks that we thought were undervalued that, you know, had not necessarily performed, but we actually still see a lot of value in those stocks. Some of the other ones have fallen enough that they're now, you know, either in fair value territory or not as overvalued as they were before. You know, this chart I've shown for a while now, and again, it shows what the composite of the value price to fair value is compared to the broad marketplace. So, if you think about in 2023, 2024, and most of 2025, you know, we highlighted that within the market valuation, the value stocks on a relative value basis were some of the most, you know, undervalued, you know, stocks, you know, across. Now, once the market took, you know, the big hit at the beginning of the year, and we saw that big rotation out of growth into value, we saw just how far overextended, you know, that became. You know, quick bounce back and forth, you know, a couple of times, but I'd say at this point, value is really pretty close to being similarly valued with the broad market. So, we're not necessarily seeing, you know, that same kind of divergence that we'd seen, you know, for those 3 years, you know, a little while ago. And then similarly, you know, we've been noting for quite a while just how undervalued small-cap stocks have been compared to the broad market. You know, they've done relatively well thus far this year until really the past you know a couple of weeks in which we have had that sell-off and again a lot of that sell-off I think is really due to those rising interest rate concerns and how that negatively impacts you know small caps more than it would large and mid-cap stocks. You know the key risks still have really the same same key risks so that we've talked about you know for you know much of the year. So there's really nothing any different you know as far as that goes. So just rolling into you know our sectors. So this is a breakout of our sector valuations by percentage of stocks in each sector and the market overall. So this one is not market capitalization weighted. I will show that you know in a little bit but again showing that by the number of stocks there are still a lot of undervalued opportunities you know out there. It's just that these are stocks that are not necessarily in the headlines takes a little bit more digging little bit more due diligence in order to be able to find you know some of these outliers that are still trading at pretty decent discounts. This just shows how concentrated you know the market is by capitalization by sector using our price to fair value. Of course you know the technology sector being you know by far the largest sector out there by market capitalization you know trading at about a 10% discount to fair value so even within that sector and we'll show this in a couple more slides you know just how much of that sector in and of itself is all concentrated in you know a lot of those you know AI leader stocks. You know communications broadly undervalued of course communications I think like 55% of the sector is just Alphabet and Meta but even away from that we see a lot of value in that sector as well. Consumer cyclicals looking attractive with as much as that sector has been under a lot of pressure year-to-date. So a number of opportunities that we can review in a few more slides. Real estate still looking undervalued. Other than that you know I would always you know caution about the consumer defensive sector. It shows as being slightly overvalued. I just note that the overvaluation within that sector is still concentrated in Walmart and Costco. Walmart stock has come off of its highs. We still think it's overvalued, still has further to fall. And Costco trading at and I forgot what the multiple is on Costco, but you know, that is probably one of the more overvalued one of the most overvalued stocks, you know, across our consumer coverage. So, taking a look at where we see value today, you know, again, just taking a look at, you know, the industrials and the utility sectors, you know, the valuations there, you know, are improving, you know, following the declines. I mean, these were like the first and the third most overvalued coming into the year. Uh they're now sectors that we're starting to see much better valuation for investors today. You know, consumer cyclical and real estate were the next two worst-performing sectors, so that's now pushed those valuations, you know, even lower. The energy appreciation over this past quarter erased the prior quarter discount, so that's now at fair value territory. Still some individual stocks there that we like, like a Devon, you know, that's kind of been one of our go-to's for a while. Still see a lot of value in the specific stocks, you know, like that. And then, you know, consumer defensive only at a slight premium after the big pullback, you know, in Walmart. And communications still by far, you know, the most undervalued sector. Just rounding out our best picks, a lot of new best picks, you know, coming from our sector directors, you know, Albemarle, of course, that's one we have talked about in multiple times in the past. When that one sold off, that's kind of been our go-to pick, you know, for the lithium industry. And then, a few more new basic materials picks here. Um not a lot really to talk about, but again, it's these, you know, kind of more, you know, smaller and mid-cap names that have been left behind that we start to see, you know, some of the most value in today. Other than that, you know, a couple of other new names in here. Uh new holding, that's one if you're looking for more of an emerging market play. That one's going to be leveraged to financial services in Brazil. So, that one I think is interesting with what we're seeing going on with the Brazilian government. Only a couple of new, you know, picks here. Looking at you know, the energy sector, you know, services like Baker Hughes, a new pick here expand energy. You know, Amazon coming back onto the list and Google, you know, also coming onto the list. Then rounding out here, Hershey's. You know, this is a stock that we've you know, recommended you know, back and forth a couple of times. A lot of volatility in a stock that you wouldn't necessarily being volatile. A lot of the story there is what's going on underlying this the fundamentals with the cocoa market, but you know, this is one where as a a long-term investor, you've actually been able to position yourself you know, in and out of that one you know, a number of times. Biomarin, I think this is a new interesting one you know, to take a look at in the healthcare sector. You know, generally I think the market is really under valuing you know, a lot of their hormone and their enzyme replacement therapies. And then a line energy making it on the list for the utility sector. Valuations by economic moat. I'd just say that a no moat stocks were the most overvalued by moat category coming into the quarter. Generally, we saw a lot of those no moat stocks slide. Specifically, a lot of those you know, commodity oriented tech hardware stocks brought that down, but you know, even after those you know, falling over this past quarter still remain overvalued today. Really still focused on you know, that wide moat category and even within that wide moat category, it's really hyper focused then on the undervalued seven. And similar to the broad market valuation, those undervalued seven stocks account for the preponderance of all of the undervaluation in in wide moat category. So, if you were to exclude those wide-moat AI stocks from the wide-moat category, the rest of the sector's actually trading at a very slight premium today. So, using our Morningstar, you know, tools, just a couple of, you know, sorts that we do here, just identifying you undervalued large-cap stocks with wide economic moats, and then rank order them, you know, from some of the most undervalued on up. Uh the most undervalued one today is Broadcom. Uh just as a little commercial, I did do a podcast on the Morning Filter with Will Kerwin. He's the equity analyst that covers Broadcom, and we did about a 45-minute or so, you know, deep dive, you know, into his view on Broadcom, and I think really review, you know, what he sees there that the rest of the market is not giving the company, you know, value for. Certainly one of our top picks, you know, for wide-moat stocks today. Then just doing a similar sort for mid-cap stocks with wide economic moats, and then lastly, you know, also doing the same thing for small-cap stocks with wide economic moats. Really, all this is is just to give you an idea of how to use some of the Morningstar tools to start looking for, scanning for, screening, you know, some of those identif- some of those, you know, undervalued opportunities, whether it's, you know, looking specifically for wide-moat stocks, or looking for stocks with like maybe a low or medium uncertainty, but again, using a lot of those different characteristics for what you're looking for uh for your portfolio today. So, with that, I'm going to take a drink of water before I totally lose my voice, and I'm going to hand it off here to uh Preston. >> Thanks, Dave. Good day, everyone. So, let me start out by outlining the the key point I want to make in this section of the presentation, and it relates to two things that everybody is talking about, AI and this rise in bond yields. And my argument is that the two are intertwined. That is, among all macroeconomic variables, interest rates are the set of variables most being impacted by AI right now. Indeed, AI in my view is is the biggest factor why interest rates are so considerably elevated above pre-pandemic levels. And insofar as you think that the AI boost will fade, at least incrementally as I do, that will put some downward pressure on interest rates in coming years. So, what's the overall economic back backdrop? Well, um So, over 2022 to '24, GDP growth averaged 2.8%. So, we've decelerated [snorts] just incrementally from that um owing to slower population growth and some other factors. Um we expect that deceleration to continue um through 2028 with um a slowdown in the growth rate in AI spending being the primary driver there. Not not an outright drop in AI spending, but just a slowing growth rate, more of a plateauing in the spending level. And then we expect growth to reaccelerate again in '29 and '30 owing to monetary policy easing. And that will be that easing will be triggered by the slowing growth rate in the economy as well as uh an eventual fall in inflation. And so, you know, inflation was moving down for a while. That downward progress was uh arrested in 2025 partly because of the tariffs contributing around 20 basis points to inflation, and they're also contributing around 20 basis points this year. But, of course, the main event this year for inflation is this energy price spike contributing around 80 basis points to the rate of inflation. And however, we we expect that that energy price price shock to subside in coming years as the market does and that will add a downward impulse to inflation. And um if you look at other factors, too, as I'll talk about like wage growth, um all of that in my mind suggests um optimism about inflation going forward. And so, we think it should, you know, converge back to the Fed's 2% target in the next few years. Um on interest rates, so you know, even before this year's run-up in bond yields, we were in a situation where rates were quite elevated and I think that was weighing on the economy. It's just that uh this has been continually offset by expansion and and AI-related expending on on the demand side of the economy, providing a key prop there. Which means that as I'll talk about once, you know, once that AI boost starts to fade, um that interest rates will have to come down in order to accommodate uh that that reduced demand-side boost. And so, in order to ensure continued healthy economic growth, um I expect the Fed to loosen monetary policy sufficient to drive the 10-year Treasury yield down to 3.5% in 2029 and later years, um down from 5.2% currently. And so, that'll take us uh quite a bit closer to a kind of pre-pandemic regime of interest rates. And so, >> [clears throat] >> concretely, uh in terms of the Fed funds rate, we do expect one more hike this year. Um might happen in, you know, this month's meeting, but uh either this month or the December meeting, I think they'll they'll hike rates one more time. But then, I think uh towards the end of 2027, they'll the Fed will pivot back to rate cutting, um cutting rates twice in 2027, and then four times in 2028 in response to that slowing economic growth that I talked about, the slowing inflation um and in a weakening labor market, which is downstream of economic growth, of course. So, we think the federal funds rate will get down to uh a target range ultimately of 2 and 1/2 to 2 and 3/4 by the end of 2028. And so, that would be uh a net 125 basis points in cuts from from the current level. And you can see that's a pretty large gap from what the market is thinking right now. So, the market is pricing in substantial uh further rate cuts or rate hikes in um not only, you know, one more at the end of this year, but then another two or three in 2027, and that high level of rates uh being held indefinitely. Uh and I I don't think that that's as I said compatible with continued healthy economic growth. That that elevated level of interest rates would ultimately cause uh a a major deceleration in growth. So, what what are we seeing in in in the overall economy? Um just to make the kind of illustrate how AI is is contributing, you know, we see tech-related fixed investment, which AI is obviously the major driver for that, you know, think data center investment. That category, that tech-related investment, is contributing around a percentage point to GDP growth in year-over-year terms. And you can So, you can see as um you know, as consumer spending has just slightly decelerated as we've had the slowdown in government spending, as all other business fixed investment has slowed, or residential investment, all of those factors uh have been offset by this expansion and in tech related driven by AI. Now, that's, you know, on the, you know, that speaks to what's driving the demand side of the economy, but really for AI to boost the rate of GDP growth, it has to boost the supply side of the economy. And the way that it would do that is through productivity. Now, productivity growth is running strong. It's averaged around 2% per year since uh, the start of the pandemic. Uh, which as you can see, uh, well, as I show in the table, that's considerably above the average over 2015 to 2019 of just 1.1%. So, we're we seem to have shifted into a higher productivity growth regime. But, that began well in advance of AI. You know, as I said, we had strong growth in 2020 and 2021 in productivity. Uh, 2022 is a bad year, but, you know, you you know, 23 and 24 were quite strong. And that was, you know, that acceleration is certainly before we, you know, AI could have credibly provided any kind of boost. So, I don't think, you know, really until the adoption of agentic tools towards the end of of last year was there any prospect of AI providing a a huge boost to productivity. So, I don't think AI has been the main driver of productivity growth yet. Um, and however, though, what I will say is that I do expect AI to sustain the strong growth rate in productivity that we've seen. And that means that even with this incremental slowing in uh, GDP growth that we project, that will be sufficient to push down the rate of job growth, and thus push up unemployment um, from 4.2% uh this year. Which is not a a large increase, but it will um uh push the Fed to to loosen monetary policy. And and I would say we're already in a state where the the labor market is slightly weak in my view. Um and I could point to different indicators, but it'll you know, ultimately I think the proof is in the pudding by looking at wage growth. So, nominal wage growth has gotten to a point where it's perfectly consistent with the Fed's 2% inflation target because it's running at about 3.7% um and what you if you subtract the productivity growth rate, which is running close to 2% from that nominal wage growth, you get the implied inflation rate. And so, that's 3.7% minus 2% is 1.7% less than the Fed's 2% target. So, the point is that the labor market is providing no impulse to inflation above the Fed's target at all right now. It's perfectly consistent with low and stable inflation. And I think that's that's downstream of this continued looseness in the labor market. It's not a you know, it's not a a super weak state, but it's it's measurably less tighter than let's say we were in 2019 on the eve of the pandemic when I think things were about in balance. Now that's weighed on real wage growth, inflation-adjusted wage growth has now dipped to about zero in the first half of this year. And that's been one factor that's pushed down on the personal savings rate. Um that low savings rate has helped to boost corporate profits this year. But also, I think households ultimately will have to correct. They'll have to pull back their consumption in order to correct that low savings rate, and that's one reason why we expect consumption growth to decelerate in coming years. Um as I said, I don't think AI is is a big boost to productivity, and and one reason why I think that is that because a large boost to productivity would entail a much higher degree of layoffs um as companies realize their labor savings, their productivity gains by by shedding uh their their labor costs. And so, if we look at the um the share of employment accounted for by uh the white-collar industries in in the BLS data, that's only modestly below its pre-pandemic trend at this point. So, maybe a it's only about uh 0.4 percentage points of aggregate employment below its pre-pandemic trend. So, and and the true impact of AI is probably only a a piece of that, I would say. You know, there has been, as you can see on the top chart, there has been a downtrend in that white-collar employment, but most of that was just a correction in this over-hiring that emerged in 2020 and 2021. So, all in all, we're not really talking about a you know, a large impact, maybe in the hundreds of thousands of jobs, I think, from AI so far. Now, we do see a canary in the coal mine just looking at the bottom chart, which is that the unemployment rate for young college grads has uh gotten quite elevated. Um you know, it's not far off its post-Great Recession mark, which is quite astounding just given the state of the overall unemployment rate. Uh but, this is uh maybe this is just a leading edge. It's not indicative of what's going on in the aggregate. So, you know, as I've mentioned, we're optimistic on the inflation front, and and wage growth, as I just talked about, That a major reason why. But, you know, if there's anything that was going to throw a wrench in our inflation forecast, it would obviously be energy markets. Oil prices are still highly elevated. Product prices are up even more. Um gasoline's doubled since January. Diesel's more than doubled, and that's you know, because of most of this year that's because most of this year it's been easier to get crude out of the Gulf than products. And and also because of the refinery outages in Russia. But the you know, the key factor really for us about energy markets is how backwardated that is downward-sloping the futures curve is. That is the futures market is implying that prices will fall dramatically over the next several years, even even over the next 12 months. Um so you can see that the 12-month price for each of these energy commodities on this chart is substantially lower than where prices are in the front month for futures. So Now, our our methodology is to rely on the futures market in our forecasting for for oil and gas prices for a 2-year time horizon. So we um you know, we assume that future you know, we know that futures markets are very efficient. Um and and that's proven itself time and time again. But you know, they could be wrong certainly. Uh markets did underestimate the duration of the war at the beginning. That much is clear. Um and you know, I can imagine a nightmare scenario, of course, where not only uh the Strait of Hormuz gets closed again, but also there's major disruption uh to a greater degree than we've seen thus far to the Red Sea. And um you know, in that case we haven't seen the peak of of oil prices, I think. Um nonetheless, [clears throat] this is what we're baking into our forecast, and and I I can't gainsay it. So let's turn to um to bond yields. So, uh and and starting starting off with just what's happened this year, you know, this increase in bond yields this year really isn't massive by historical standards, as you can see from the chart that the 10-year is up by 100 basis points, which even when we're not in economic cycle turning point has happened many times in the past. But, the reason why it's attracted so much attention is because it came at a time when interest rates were already so elevated above pre-pandemic levels. And so, now the 10-year yield is up 2.7 percentage points above its 2017 and 2019 average. And and the key thing behind that in my view is the AI boom. And however, there's there's another story that's that's out there, which is that this is all about the increasing risk of a government debt crisis. What I'll say though is that at least for the US, the story doesn't make a lot of sense. And so, if we look if we look um, you know, even in the period in 2025 when this so-called debasement trade was playing out and and gold was rising, um and we saw an expansion in in, you know, long-term bond spreads, you know, the 30-year rising versus the 10-year. Throughout that whole period, long-term inflation expectations were muted. So, what this chart does is it decomposes both the 30-year and the 10-year yield into their real or inflation-adjusted component and the break-even inflation rate, which is just the bond market implied inflation rate. And you can see the 30-year break-even and the the 10-year break-even, that the red lines, um both of those have been utterly stable uh since the beginning of 2025, even as um, you know, even as we have this rally in gold and even as yields have increased so dramatically this year. What that suggests to me is that first off that this, you know, this rally in gold may be more about speculative momentum than in asset prices than it is a really rational pricing in of risk. And and also that as I stated, I don't know if for the US that government debt worries are the main thing that have been driving yields higher. And and just to kind of hammer the point home here, you know, for the US the main risk I think that would materialize from a government debt crisis would be uh inflation. You know, there's there's two main ways to get yourself out of a of a debt crisis, you know, assuming that you can't cut spending or can't cut deficits, then ultimately the government either defaults or in inflates its way out of the debt. And the latter is a much more likely outcome by far for the for a country like the US which controls its own currency. And so we don't [clears throat] it's it's quite striking that we don't see any increase in long-term inflation expectations being priced into the bond market. It's all on the real side. And so that speaks to things other than government debt risk in my view driving bond yields. And why do I think it's, you know, AI is the major factor? So if you look within private fixed investment, what we really see is this crowding out of other spending by AI-related spending via the mechanism of interest rates. So tech-related spending, both the IT equipment, data center-related spending, as well as software R&D, you know, you can see that sword on this chart here and it and it accounts for actually more than all of the growth in private fixed investment that we're seeing. Uh high-tech investment up 15% year-over-year in the first half of 2026, but all other um private fixed or non-residential fixed investment was down 4%. Uh residential investment also down, so most other types of fixed investment are very weak right now because I think interest rates are high and interest rates have been driven up because of this AI factor, which is, you know, boosting the demand side of the economy despite interest rates being high. So, there as I said, there's this crowding out effect that you see. And what that means though is that you know, ultimately if if this AI boost fades, then I think we will see a major correction in interest rates and and I kind of see three paths forward basically for the AI boom. Now, one the first path, which I think is I think there's a very good argument for it and if you, you know, certainly listen to people who are close to the tech sector, this is their base case, which is that the boom realizes its return on investment. Um all the the investment that we've seen is justified. But the way that that justification would happen, that that realization of ROI would would manifest is, in my view, overwhelmingly via mass layoffs. In fact, very likely, I mean, in order to just pay for the amount of investments that's that's occurring over the next 2 years, we'd have to see several million in uh millions in layoffs of of white-collar workers predominantly um in order to uh create a labor cost savings that would uh pay for the AI spending that companies are engaging in. Um because ultimately, you know, the people who are paying for the data centers, they have to get revenue from end users, uh businesses who are dispersed throughout the entire economy. So, if that happens, that's going to be a contractionary shock for the economy, right? Because you'll have a significant uptick in unemployment. Of course, in the long run, those workers can be redeployed, but in the short run at least, you're talking about a large uptick in unemployment that um will pressure consumer spending in other parts of the economy. Uh as well as a perhaps a rise in precautionary savings for people who still have their jobs, which is the opposite of what we're seeing right now with the savings rate being very low. And so, that would be a big contractionary shock that the Fed would have to offset by lowering interest rates. Now, suppose that doesn't happen, then I think we're looking at looking at a major correction in spending because or I think it's quite credible to expect a major correction in spending if those labor cost savings don't occur. In which case, we also would have a big contractionary shock hitting the economy in the form of falling AI-related spending. That also would put pressure on downward pressure on interest rates. The Fed would need to offset that contractionary shock. Now, the the third path is that the bubble just keeps or that we truly turn into a bubble and it just keeps inflating, which is that despite any near-term realization of return on investment, spending continues to grow higher. And what I would say is that can only go on for so long. In the short run, that could continue to push up stock prices, continue to push up interest rates um in contrast with our forecast, but that only has a a limited runway because at some point the gargantuan levels of spending that we're seeing have to demonstrate some return on investment in my view. It's just a question of when. And so, with that, I'm going to turn it back over to Dave to to wrap up our prepared remarks. >> All right. Thank you, Preston. All right. Just want to highlight a couple of things before we turn to the question section, but I think this heat map really is indicative of showing just how concentrated the undervaluation in the stock market is, you know, based on our valuations today. And you can see in the blue, you know, on the the left-hand side of the screen, you know, what we're calling, you know, the undervalued seven. Now, I think the big difference with investing in AI today that maybe where we are versus the rest of the marketplace is when I'm thinking about investing in AI, I really want to stick with the technological leaders in artificial intelligence. Those companies that, you know, are developing, you know, new chips, developing, you know, new software, developing, you know, new models, as opposed to those companies that we're calling the AI followers, those that are the ones that have really been able to benefit in the short term because of the supply-demand you know, imbalance for the amount of equipment and hardware that they need for building out all the data centers today. You know, we are seeing those those companies are, you know, redeveloping, redeploying their assets to be able to increase supply. They're building out new facilities. You know, we expect that 2028 is probably the peak of the market as far as the supply-demand imbalance, and then we expect that to quickly correct in 2029 and thereafter. And they that's some of the biggest differentials in our views like on a Micron stock than I think what the market is pricing in today. But again, I think this really just highlights how the undervalued seven just really dominate you know where we see value you know in today's marketplace. And then getting back a little bit to what we talked about earlier, you know, how to be able to position oneself. So again, when you look at which category these stocks are in between you know the growth category and the core category, stocks that are in the core category yet we still think you should underweight the category overall means that you want to be overweight the individual core stocks that are undervalued and then have an even less underweight and maybe some of the mutual funds or ETFs that you use in order to get exposure to core. And then of course within the growth category being very focused on those companies that are undervalued. Uh the value category I still think you can use mutual funds and ETFs in order to get some broad exposure across the entire category and value. We don't see nearly as much concentration of undervalued opportunities in value uh that we do in the growth category. Couple of charts just talking about you know the market concentration. Uh really hasn't been that much of a shift you know in these you know over the past couple of quarters. But again just showing you know just how focused the market is in just you know a handful of these stocks which you know if there's any kind of disruption you know to the story to the investment thesis here you know any broad sell-offs in these stocks of course then have an even greater impact you know on the market to the downside. >> [snorts] >> And then just you know wrapping up here with uh some of the undervalued mega cap stocks how they performed over the past quarter. A couple of them actually have not done very well like a Broadcom uh unfortunately slipped a little bit but that's still a stock that we have a lot of confidence in going forward. You know taking a look at what the uh overvalued stocks have performed. Pretty much most of these you know have fallen to some degree over the past quarter. You know some of these Applied Lam Cat you know have fallen you know pretty substantially over the past three months. Uh a lot of them getting into that three-star territory where they're probably now more in the fairly valued, you know, range as opposed to being as overvalued, but you know, here's where um a lot more of these, you know, have performed because we did have so many of these overvalued mega caps uh last quarter. Again, a lot of red on that screen where you see these have fallen, you know, into our three-star territory. Updated list of undervalued mega caps. So, again, you can really see how, you know, the undervalued seven really dominate, you know, the most opportunities, you know, that we see today. And then the updated list of overvalued mega caps. A lot of these going to be, you know, story stocks really based on, you know, either continued short-term growth going, you know, too far into the future or maybe a stock like a Micron where we just have a differentiated view where we think that 2028 is going to be, you know, the the peak for them being able to generate revenue and operating margin, and then that will quickly, you know, correct to the downside thereafter. You know, fixed income outlook, you know, rising rates really just battered the market, you know, across the board. Pretty much the entire yield curve, you know, has shifted upwards. Uh so, you can see what the losses were, you know, by the individual types of categories here. And then just again highlighting just how tight corporate credit spreads are. You know, we saw them, you know, widen out pretty substantially, you know, in early 2025. We got a little bit of a sell-off in early 2026 again, but you know, they still are just at what I consider to be just way too tight a levels. Now, we don't have an index to show exactly what's going on with the private credit market. I would just note that on the private credit market, they still continue to see more demands for redemptions than their gates allow. So, there's still people trying to take more money out of private credit than they're able to take out of private credit, you know, every quarter. >> [snorts] >> And then Morningstar DBRS, which is our credit rating agency subsidiary, has noted in their most recent report that even more private middle market issuers are requiring, you know, even more relief. So, at this point of the companies that they have credit ratings on, you know, 25% of them are under some sort of, you know, operating pressure. And 15% are looking for waivers or they need capital support. So, that's up from, you know, 10% a year ago. So, it is a category that we still continue to see, you know, getting worse, you know, going forward. And just our long-term charts, you know, for, you know, credit spreads. So, for the investment grade market and the high yield market. >> We hope you enjoyed the webinar and we hope you'll join us on the Morningstar podcast every Monday at 9:00 a.m. Eastern, 8:00 a.m. Central. Happy investing.