A recent Morningstar webinar on the state of the economy conveyed a generally optimistic message, albeit with a cautious stance and a desire by some players to lock in gains rather than put further chips on the table. AI was an important discussion point.

Analysts and economists don’t usually talk about their personal portfolios.

But at the end of Morningstar’s 2026 Market Outlook webinar, CEO Kunal Kapoor asked panelists to reveal what they’re doing in their own portfolios. Until then, they focused on the surprising resilience of the US market in 2025 and whether it could be sustained in 2026.

Overall, panelists were optimistic, noting that Morningstar believes that the US stock market is still 5 per cent undervalued. “Despite those rallies that we’ve had, there is still some upside,” said market strategist Michael Field. Signs of distress in the economy “are still low,” added Preston Caldwell, the research company’s senior US economist.

Nonetheless, in response to Kumal’s question, Field and market strategist Kai Wang said they’re locking in 2025 gains and keeping their powder dry. 

Fields said he is trimming some of his positions that have “reached their fair value estimates or are even overvalued at this point and freeing up a little bit of cash for the inevitable dips that will come at some point.” Likewise, Wang said he is “looking to trim some of the fully valued positions” to raise cash. He identified bitcoin’s recent volatility as a “leading indicator of risk-on sentiment…and how investors feel right now.”

Wild cards
Going into 2025, tariffs, artificial intelligence, interest rates and the labor market are the biggest wild cards, according to the Morningstar analysts.

After initially sending the markets into a tailspin in April, tariffs imposed by the Trump administration have surprisingly not put much of a dent in a robust US economy. But tariffs’ impact may “still be ahead,” Caldwell cautioned, resulting in inflation, a pullback in consumption in slower growth.

As for interest rates, Morningstar expects six cuts in the next two years, leaving the yield on the 10-year Treasury bill at around 2.5 per cent. But a rise in inflation and unemployment could easily throw off that scenario, Caldwell acknowledged.

The market’s “willingness to bankroll this massive bet on artificial intelligence” was one of the biggest surprises of 2025, according to Caldwell. AI should have a “massive impact” on the economy again next year, he said, as “winners and losers” are sorted out by the market.

A reasonably optimistic scenario is that AI can “unlock some tens of trillions of dollars in terms of present value future GDP growth uplifted,” Caldwell said. “If the top AI-related stocks capture even 20 per cent of that value created then their valuations are entirely justified. The downside scenario is that that value isn’t captured.” 

Digesting new AI developments
The artificial intelligence comments came as markets were digesting a flurry of AI-related news. 

Nvidia just reported that its quarterly profit had jumped to nearly $32 billion, up 65 per cent from a year earlier and 245 per cent from the third quarter in 2023. The AI chip maker, which is the first publicly traded company to be worth $5 trillion, makes up 8 per cent of the Morningstar US stock index, Field said, warning of concentration risk.

Amazon founder Jeff Bezos’ AI startup, Project Prometheus, is entering a crowded market with a hefty $6.2 billion in funding, despite growing fears of an “AI bubble,” fueled by fears of excessive debt and circular financing. Alphabet CEO Sundar Pichai told the BBC that skyrocketing AI valuations were being driven in part by “irrationality” that could result in widespread damage to financial markets.

But Mohamed El-Erian, chief economic advisor at Allianz, is arguing that the AI bubble “may be OK.” The belief in the technology’s transformative power “is justified,” El-Erian, who is also a professor at the Wharton School of the University of Pennsylvania, wrote in a New York Times op-ed. “The resulting flood of capital is a logical response. Some will lose. Overall, we will be much better off.”