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

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Sorry, quick break for legal. To learn more, visit vanguard.com/audio. All investing is subject to risk.

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Investments in bonds are subject to interest rate, credit and inflation risk.

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Vanguard Marketing Corporation distributor.

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Vanguard.

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Please stay tuned for important disclosure information at the conclusion of this episode.

Susan Dziubinski (0:54)

Hello, I'm Susan Dziubinski. 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 themorningfilteratmorningstar.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 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 13, 2026

Dave Sekera (1:44)

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 a valuation 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 30, 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 1600 stocks 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 they're goal-seeking. They come up with some sort of S&P 500 earnings estimate, slap some sort of multiple on top of that, and then tell you what the market is 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 podcast 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. 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 today's levels. Then I also want to note here that again, we're having another shift in our valuations towards a barbell-shaped portfolio, slightly overweighting value, slightly overweighting growth, and in order to pay for those overweights being underweight core and we'll get into that a little bit more as we talk about how the skew from the undervalued seven 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 market weight equities. I'm not necessarily ready to go to an overweight yet. A lot of times when you get to about this amount of discount or slightly more, it's a good time to start overweighting. But when I look at the macro dynamics out there, and we've talked about this on the podcast and I believe the last webinar as well, macro dynamics are really getting pretty ugly. They're a lot more challenging for the marketplace 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 five and a quarter 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. Inflation, still elevated, not necessarily rising at scary rates at this point in time, but certainly higher than you or I or the Fed certainly would prefer. The US economy is reliant on the AI buildout. We're still expecting that AI buildout 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.