The independent investment research firm is also urging investors not to overreact to short-term headlines, noting that tariffs, central bank leadership changes and geopolitical tensions may fuel volatility over the coming year.
“Artificial intelligence, in particular, has the potential to drive sustained productivity growth, which could lift GDP and influence interest rates and other key economic variables,” the report said.
In the firm’s 2026 Global Outlook Report, Morningstar argues the race to build AI infrastructure has become one of the defining investment stories of this era and warns investors may be more exposed than they realise.
Its Global Outlook Report emphasises the influence of “hyperscalers” such as Meta, Alphabet, Microsoft and Amazon, which are investing hundreds of billions of dollars into AI-related infrastructure.
These companies are constructing vast data centres both for internal use and to supply computing power to companies, governments and AI chatbot providers – activity that is increasingly steering financial markets.
“To put this in perspective, their combined 2026 capex will be more than four times what the publicly traded US energy sector spends to drill exploration holes, extract oil and gas, deliver gasoline to its stations, and run large chemical plants,” the report said.
“Amazon’s capex alone is greater than that of the entire US energy sector.”
However, Morningstar warns that the rapid build-out of AI infrastructure, especially without clear monetisation strategies, introduces material downside risk.
“If investor sentiment shifts, the resulting pullback could have significant macroeconomic implications.”
Although real-world adoption of AI remains early, US equity investors are already heavily exposed. Morningstar Indexes, working with Morningstar Equity Research, created the Morningstar Global Next Generation Artificial Intelligence Index to track companies most leveraged to AI.
“US stocks in this index make up more than 30 per cent of the value of the Morningstar US Target Market Exposure Index,” the report said. “If you own mutual funds or exchange-traded funds linked to broad US equity indexes, you’re already invested in AI.”
For investors seeking to reduce concentration risk or avoid outsized AI exposure, Morningstar recommends diversifying into US value and small-cap stocks, which trade at discounts to its fair value estimates and carry far less AI concentration, or reallocating to select foreign equity markets.
Morningstar also believes communication services (Alphabet, Meta) and IT (Nvidia, Microsoft) are trading at price-to-sales levels near or above tech-bubble peaks.
The research house also noted the combination of a twin boom in artificial intelligence and gold, which has gained popularity as a perceived hedge, is reshaping markets, but warns investors may be drifting into dangerous territory.
CIO Matt Wacher notes increasingly common large market swings, pointing to big gains in September extending into October.
“This is true for shares, bonds, currencies and commodities, with gold rocketing this year up over 60 per cent. This sharp price is the result of investors and central banks buying to diversify their assets away from US dollars. We’re seeing these moves because of concerns around the high level of debt, deficits and the independence of the US Federal Reserve.”
Wacher highlights gold’s small asset-class size, making it especially vulnerable to sharp swings when sentiment turns.
“As with all financial assets, huge price rises and frenzied universal popularity don’t bode well for future returns, so investors should take note of the large falls in price that followed comparable episodes in the past.”
For non-US investors, Morningstar notes that dollar exposure can grow large in portfolios with heavy equity allocations due to the dominance of US stocks – and managing this exposure requires balancing hedging costs with diversification benefits.
Unlocking value in a concentrated market
The top 10 US stocks now account for more than one-third of the total market – up from 18 per cent ten years ago.
Morningstar says this rising concentration risk is making investor portfolios increasingly vulnerable to shocks.
“We think investors should be mindful of how much of their wealth depends on a single theme or group of stocks.”
Despite this, Morningstar sees compelling opportunities both within and outside the US.
“We continue to favour US small caps, which have meaningfully lagged their large-cap counterparts over the past several years and trade at much cheaper valuations … from a sector perspective, US healthcare stands out as an opportunity in an environment where most sectors appear fully valued.”
Beyond the US, Morningstar identifies emerging markets such as Brazil, China and Mexico as offering further upside potential in 2026. In developed markets, the UK and continental Europe trade at reasonable valuations.
“Not all European countries are equally attractive, however. Our stock-level analysis shows Denmark, Portugal, and the Netherlands as the most undervalued, followed by Germany and France, while Italy, Spain, and Belgium are relatively overvalued.”
“We believe investors should embrace opportunities both inside and outside of the US, taking advantage of more attractive valuations, while simultaneously reducing their dependence on the concentrated bet that is the Magnificent Seven.”
Asian equities, meanwhile, have quietly outperformed US stocks in 2025 despite the hype surrounding US tech and the turbulence created by President Donald Trump’s tariffs.
“As investors broadened their search beyond the ‘Magnificent Seven,’ much of the region’s gains came from a narrowing valuation gap with US markets,” the outlook said.
Morningstar says the next leg of Asian market returns may be driven by structural changes, including China’s emerging “anti-involution” campaign aimed at curbing deflation and promoting a more disciplined, profit-focused market environment.
“Among the industries most impacted, we’ve identified electric vehicles, batteries, cement, and solar as those where industries are likely to benefit the most.”
