US stock market outlook: It’s time to reallocate from growth to value

Key takeaways:

• It’s time to harvest profits from the growth category and reinvest into value.
• The significant undervaluation in the technology sector has narrowed.
• The US stock market is trading at a 5% discount to the composite of our valuations.
• Dislocation across styles and sectors has normalized since March 30.

Barbell portfolio reallocation update

In March we recommended increasing allocations into the growth category (specifically into technology and artificial intelligence stocks) by harvesting profits from the value category (specifically energy stocks). Since then, growth and technology stocks have rallied significantly while value has only gained modestly. As long-term investors, we don’t try to time the market but look to adjust portfolio positions when warranted as markets and valuations move.

From March 30 to May 18, the Morningstar US Growth Index has risen 20% and the Morningstar US Technology Index has risen 32%. Nine of the top 10 contributors to the market return were directly tied to AI. Comparatively, the Morningstar US Value Index has only risen 4%, and the Morningstar US Energy Index has fallen 3%.

Based on our current valuations, we think now is an opportune time to harvest returns in the growth category (specifically technology and AI stocks) and reallocate those proceeds back into value. Looking forward, we think getting back to a barbell-shaped portfolio (half value and half growth) provides the balance between protecting against downside volatility yet still allowing investors to participate in future upside. In addition, it allows investors the ability to reallocate as valuations warrant.

The growth category is now only trading at a 5% discount to fair value, whereas on March 30, it was trading at a 20% discount, a much greater margin of safety than today. Value stocks have become slightly more undervalued, as they are currently at a 7% discount as compared with a 5% discount on March 30.

The technology sector remains undervalued at a 7% discount to a composite of our fair valuations, but considering it was trading at a 25% discount on March 30, it no longer provides as much excess margin of safety. Similarly, the discount for the communications sector, which contains AI giants Alphabet GOOGL and Meta META, has narrowed to a 12% discount from a 17% discount.

Comparatively, the premium for the energy sector has dropped to only a 4% premium as compared with an 18% premium at the end of March. Among other value sectors whose valuations have dropped, the premium for the utility sector has shrunk to a 1% premium from 7%.

Following the rally, US stocks no longer as undervalued

At the end of March, the market was trading at a 12% discount compared with a composite of our valuations. Since then, the Morningstar US Market Index has risen 16%. Based on a combination of the market rally partially offset by increases in a number of our valuations, as of May 15, 2026, the US equity market was trading at a 5% discount.

Looking forward, volatility expected to remain high

In our 2026 Market Outlook, we warned that a number of key emerging risks could lead to this year being more volatile than last. In order to take advantage of this volatility, we recommended a barbell-shaped portfolio, with one half of the barbell containing high-quality value stocks (especially undervalued energy stocks) and the other half of the barbell being invested in growth stocks (especially undervalued technology and AI stocks).

The strategy behind this allocation was such that, during market rallies, we expected undervalued stocks in the technology sector, especially those most closely tied to AI, would significantly outperform to the upside. As such, once they hit fair value, they could then be sold to lock in profits, and one could reinvest in value stocks, which we expected to lag. Conversely, during market selloffs, we expected value stocks to benefit as investors rotated out of growth, and once value stocks neared fair value, investors could lock in profits and reinvest in undervalued growth stocks.

Many of the catalysts we expected would generate volatility remain outstanding, and new issues have surfaced. Catalysts include:

• Over the past week, upward price momentum on AI stocks has run out of steam.
• Interest rates are rising, not just in the US, but globally, with Japanese government bonds hitting their highest yields since 1997.
• Inflation is rising/accelerating.
• We expect no change in monetary policy over the foreseeable future, as the Federal Reserve will be unable to cut the federal-funds rate.
• There were no new meaningful agreements or deals announced during President Donald Trump’s trip to China.
• We suspect trade and tariff negotiations will return to the headlines this summer.
• Oil prices remain elevated, as there has not been any resolution to the conflict with Iran.
• Recent economic indicators out of China indicate its economy is slowing more than anticipated.
• Midterm elections will be here before you know it.

Yet, while risks abound, investment in the artificial intelligence buildout boom remains full steam ahead, and the long-term opportunity in AI remains compelling.

We think investors should continue to hold exposure in AI; however, investors need to judiciously invest in those companies that will benefit from artificial intelligence in the long run and balance that exposure against valuations. The history of previous technology cycles suggests investors need to distinguish between companies at the forefront of AI technology with long-term, durable competitive advantages, such as undervalued Nvidia NVDA and Broadcom AVGO and those that supply commodity-oriented hardware whose stock price action is being driven more by narrative than fundamentals, such as overvalued Ciena CIEN and Micron MU.