Morningstar's Call: Time to Reallocate from Growth Back to Value (May 2026)
In mid-May 2026, Morningstar's Chief US Market Strategist, David Sekera, CFA, officially recommended that investors reverse course from their late-March strategy. In a tactical shift, Morningstar advises trimming profits from the high-flying technology and artificial intelligence sectors to re-establish a balanced, barbell-shaped portfolio split evenly between growth and value.
This recommendation directly reverses their March 30, 2026, tactical call to overweight growth. Between March 30 and May 18, 2026, that overweight paid off handsomely: the Morningstar US Growth Index surged 20% and the US Technology Index skyrocketed 32%. In contrast, the US Value Index gained only 4% and the US Energy Index fell 3%.
As a result of this dramatic performance gap, valuations have shifted significantly:
- Growth: The growth category's discount to fair value has narrowed to just 5% (as of May 15, 2026), compared to a deep 20% discount on March 30.
- Technology: The tech sector's discount compressed from 25% to just 7%, greatly reducing the margin of safety for new buyers.
- Communications: Alphabet (GOOGL) and Meta (META) saw their combined sector discount narrow from 17% to 12%.
- Value / Energy: Conversely, the energy sector's premium fell from 18% to just 4%, and utilities dropped from a 7% premium to a 1% premium, making value sectors highly attractive once again.
The Barbell Strategy & Stock Dispersion
Morningstar's barbell strategy (half value, half growth) is designed to let investors lock in profits during growth rallies and redeploy capital into lagging value sectors, while protecting against downside volatility.
Strategists warn that investors must now be highly selective, particularly within the AI space. They advise distinguishing between companies with durable competitive advantages and those trading on pure narrative:
- Durable AI Leaders (Undervalued): Nvidia (NVDA) and Broadcom (AVGO) are highlighted as holding long-term competitive advantages.
- Commodity-Oriented Hardware (Overvalued): Ciena (CIEN) and Micron (MU) are flagged as being driven more by narrative than fundamentals, trading above their fair values.
Macroeconomic Catalysts for Volatility
Morningstar expects market volatility to remain highly elevated through the summer of 2026, driven by several looming catalysts:
- AI Momentum: Upward price momentum on AI stocks has recently run out of steam.
- Global Interest Rates: Rates are rising globally, with Japanese government bonds (JGBs) hitting their highest yields since 1997.
- Inflation and Fed Policy: Inflation is accelerating, and the Federal Reserve is expected to keep the federal-funds rate on hold.
- Geopolitics and Trade: No new agreements were reached during President Donald Trump's trip to China, raising the likelihood of trade and tariff negotiations returning to headlines. Meanwhile, oil prices remain elevated due to the ongoing conflict with Iran.