Morningstar Research strategist: “We’re in the eye of the hurricane”

It’s easy for stock investors to feel a bit at sea at the moment.

After plunging 11% to start April, the S&P 500 bounced hard, recently enjoying a run of nine consecutive daily gains that — at least briefly — helped the blue chips reclaim all the ground lost since President Trump declared the start of the tariff war on April 2.

But where to from here?

With stocks sputtering a bit over the last couple days, we thought it would be worthwhile to speak with David Sekera, chief US market strategist for Morningstar Research, the venerable Chicago-based stock and mutual fund research outfit.

Sekera and the firm take a bottom-up approach to the markets, with Morningstar’s Equity Research Group covering 1,600 global shares using a value-investing approach that emphasizes accurately estimating a company’s earnings power and “intrinsic value” and then determining whether the price the stock is trading at is cheap (and therefore attractive), expensive, or more or less at fair value.

Here are some highlights from our interview on Monday, edited for concision and clarity.

Sherwood News: Where are we in the stock market right now? I’ve lost my grip on where we are in this story that started with the market sell-off in February, worsened with the tariffs, and then has sort of snapped back.

David Sekera: To me, it kind of feels like we’re in the eye of the hurricane. I think the earliest signs of the impending storm started earlier this year. In February and March, we had the bear market in the artificial intelligence stocks.

Then the hurricane made landfall when Trump announced the Liberation Day tariffs on April 2 and stocks of course quickly plunged, falling as far as 20% down from the highs.

So they implemented the pause and the stock market started to move back up. The focus shifted to earnings season, which I’d say generally has been relatively benign. Here, at the beginning of May, it seems like we’re in a period of relative calm. That’s why I think it feels like we are in the eye of the hurricane.

Sherwood: What’s next?

Sekera: The trade agreements still need to be completed. If my math is right, that 90-day pause will last until July 8. I suspect we won’t have new trade agreements completed until we start really getting closer to that deadline.

We did see a pretty good amount of pull forward as far as people buying as much inventory and supplies as they could before the tariffs are supposed to go into effect. But I think we will see some supply and transportation dislocation. That will result in a number of disruptions and probably earnings distortions this next quarter.

Sherwood: Dislocations? Could you drill down a little bit on that? What are you envisioning when you say that? Do you mean empty shelves or are you talking more in terms of economic data, higher inflation, lower growth, things like that?

Sekera: We are looking for the rate of economic growth to slow sequentially each quarter for the remainder of this year. Our base case is still no recession, but we are looking for that sequential slowdown.

Sherwood: And what’s the implication for the market there?

Sekera: Not only do we have to wait for the trade agreements to still get negotiated, but we’ve still got supply and transportation dislocations, disruptions, and earnings distortions coming up, and the economy is slowing. Also, I suspect the Fed is going to be on hold for now.

If we’re correct and the stock market suffers another sell-off, I’d recommend keeping enough dry powder to move back to an overweight position once valuations warrant.

Sherwood: Do you have certain sectors or parts of the market you would recommend moving into?

Sekera: We did recommend overweighting value stocks, as they are trading at the greatest discount to fair value right now, as opposed to growth stocks, which is what we recommend as underweight because they’re still trading at a 3% premium.

Sherwood: And by growth stocks, you’re talking about Russell 1000-growth-style companies — fast annual earnings growth, high price-to-earnings ratios?

Sekera: Yes, similar to that.

Sherwood: So much of the leadership of the S&P 500 has been derived from the Magnificent 7 over the last couple of years: Nvidia, Tesla, etc. Where does that factor into all of your thinking?

Sekera: At the beginning of the year, technology was a bit overvalued because those AI stocks were generally overvalued, but now that we’ve had the bear market in AI stocks, those are down 20% or more pretty much across the board. The technology sector is now looking pretty attractive, trading at a 9% discount to fair value. So it’s not the most undervalued sector, but it’s certainly much more attractive at this point.

Interestingly, the most undervalued sector right now is communication services. It’s heavily skewed by large-capitalization stocks, because you’ve got Alphabet and you’ve got Meta in that sector, both of those being very undervalued.

But having said that, there are also a lot of more traditional communications and media names in there. Verizon is one that we’ve been highlighting as being very undervalued. We have been recommending AT&T and Verizon for several years now. I still see upside potential in Verizon, and it’s also another one that pays a very attractive dividend where you can get paid to wait.

We also think small-cap stocks [iShares Russell 2000 ETF] are very undervalued here. I think it might take at least a couple quarters before small-cap starts start to work, but that would be an area that I’d look to rally very quickly.

Sherwood: All right, David. Thanks very much for your time. It’s been great to speak with you.

Sekera: Anytime. Have a great rest of your day.