Markets Brief: How Investors Can Profit From Volatility

A Market Correction Can Be Healthy

The Morningstar US Market Index ended last week down 3.2% making for a year-to-date loss of 2%. While commentators made much of the slightly disappointing jobs numbers, the ever-changing prospects for international trade, and the wider range of economic outcomes, it is unclear whether this has meaningfully changed the key market drivers. The decline appears to be better explained by a reversion to a reasonable assessment of the fair value of stocks after a period of excess enthusiasm for some companies and indifference to others.

Supporting this view is the movement in US growth and value stocks. After rising over 40% higher than value stocks over the last two years, growth companies have underperformed this year by 10%. To learn about the opportunities this creates, check out Dave Sekera’s latest US Market Outlook. For more about Friday’s job report and its impact on our economic outlook, read this article by Tom Lauricella and Sarah Hansen.

Avoiding Investing Rules of Thumb

While growth and value provide a useful lens on the market, avoid assuming these groupings are homogeneous. For example, financial services stocks are typically included in the value group, but they led the decline last week with a fall of 5.9%, with banks and asset managers each down around 8%. When navigating volatile conditions, it is important to dig a little deeper, prioritizing research over reaction and avoiding rules of thumb. The prospects for companies gathered under a broad market or even sector grouping may differ significantly. Check out the latest US Asset Management Industry Report by Morningstar’s equity researchers.

Magnificent Seven Stocks Come Back to Earth

The need for deeper research is also evident from the consumer cyclical sector. Having risen 75% over the last two years, the sector has fallen 9.6% this year, driven lower by industry heavyweights Amazon AMZN, Tesla TSLA, and Home Depot HD. As members of the “Magnificent Seven,” the former two names reached prices well above Morningstar’s fair value estimates. However, following the recent declines, Amazon appears undervalued, while Tesla is near its fair value. In contrast, Home Depot continues to be priced well above its estimate.

Healthcare was the only sector to deliver positive returns over the week, and that amounted to only 0.05%. However, it remains the highest-returning sector over the year to date, with a gain of 7.7%.

A Silver Lining for Investors

Although sharp declines in indexes are always uncomfortable for investors because of our intrinsic aversion to losses, price changes that move assets closer to their fair value are a feature rather than a bug of capital markets. They ensure more capital can be invested with the expectation of a reasonable return over the long term.

The challenge is that many investors focus on near-term price movements and forget investing is a long-term endeavor. Capitulating to such myopia can damage our eventual success. When changing your portfolio amid this market, remember the old carpentry motto “Measure twice, cut once.”

Emerging-Markets Stocks Outperform

As investors become less enthusiastic about US stocks, overseas markets continued to deliver higher returns, with the Morningstar Developed Markets ex-US Index up 2.7% over the week and 9.0% over the year to date. The Morningstar Emerging Markets Index rose 2.8%, driven by China, up 6.4% over the week and 19.2% in 2025.

However, it is important to note that these returns were flattered by a 3.5% decline in the US dollar over the week. Despite this, Morningstar’s capital markets team continues to see greater opportunities for investors in these markets than those in the US.

Core Inflation in View

Inflation will be back in the spotlight this week ahead of the Federal Reserve’s meeting next week. The latest Consumer Price Index report is due to be released Wednesday. Core CPI, which excludes volatile food and energy costs, is expected to remain stable at 3% over the last 12 months.