Stock Sector Outlooks: Morningstar’s Top Q2 Picks Across the Market

The year started with investors rotating away from stocks in sectors that had been big winners throughout the bull market—namely, technology and communication services. In their place, sectors such as basic and materials, which had been lagging, turned higher in the first quarter. The energy sector was far and away the top performer, as those stocks rode the surge in oil prices.

What’s next for the stock market? We’ve collected the sector outlooks from across the market and Morningstar’s top picks in each.

Technology

Technology stocks headed south in the first quarter, but Morningstar senior equity research analyst Dan Romanoff writes that confidence in secular tailwinds, such as cloud computing and artificial intelligence, remains intact. Top picks include Microsoft MSFT and Broadcom AVGO.

Communication Services

Michael Hodel, director of communication services equity research for Morningstar, discusses why Meta Platforms META and Alphabet GOOGL/GOOG have maintained their wide economic moats in the face of the artificial intelligence revolution. Disney DIS and Omnicom OMC are highlighted as among the top picks in the sector.

Utilities

Senior equity analysts Travis Miller and Andrew Bischof explain why utilities stocks are coming off their best two years of returns in 20 years, and why, after a brief pullback at the end of 2025, valuations are again looking attractive—especially with the sector’s higher earnings growth potential. They dig into Edison EIX and WEC Energy WEC as opportunities for investors.

Consumer Cyclicals

Consumer cyclical stocks were hit hard last quarter, but Erin Lash, sector director of consumer equity research, says those declines have resulted in a slew of undervalued names. Top picks in the sector include PVH PVH and Kohl’s KSS.

Financial Services

Financial stocks were hit by a one-two punch in the quarter, as worries about AI undercutting business models were accompanied by growing wariness around credit quality issues and outflows from private credit. Against this backdrop, Sean Dunlop highlights LPL Financial LPLA and Blackstone BX.

Real Estate

Kevin Brown, a senior equity analyst who follows real estate stocks, traces the sector’s recent spells of outperformance and underperformance amid interest rates’ ups, downs, and ups again. Names to buy among real estate stocks include Kilroy KRC and Invitation Homes INVH.

Consumer Defensives

Consumer defensive stocks lived up to their name during the volatile first quarter, and with their outperformance, the sector is trading at only a slight discount to its average fair value, Lash writes. However, some 37% of names in the sector are rated 4 or 5 stars, including General Mills GIS and Mondelez MDLZ.

Energy

Energy stocks surged in the first quarter as the Iran war sparked a huge jump in oil and gas prices. Joshua Aguilar walks through the dynamics and unknowns surrounding the war’s impact on energy prices. He highlights his top picks, including Devon DVN and Energy Transfer ET.

Basic Materials

Basic materials stocks had a banner start to the year, with the sector chalking up returns second only to the rally in energy. The bad news for investors looking to put money to work in basic materials is that most of the sector is fairly valued or overvalued, writes senior equity analyst Seth Goldstein. Still, he says there are opportunities among chemicals and agriculture stocks, among them Qnity Q and Mosaic MOS.

Industrials

Industrials are another sector where investors will have to do some digging to find undervalued names. Still, Suryansh Sharma, who heads up industrials coverage, writes that Morningstar sees attractive names in the farm, heavy construction machinery, and construction industries. That includes Masco MAS and CNH CNH.

Healthcare

Healthcare stocks continue to lag the broader market, but Karen Andersen, a director at Morningstar, writes that there is reason for optimism, including the defensive nature of the sector, innovation, and potential benefits from AI. Top picks include Elevance ELV and IQVIA IQV.