From AI Spending to Recession Risk: The Questions Advisors Are Asking About the US Stock Market Outlook

The investment landscape remains heavily influenced by artificial intelligence spending, elevated interest rates, and a US stock market that is increasingly driven by a small group of mega-cap technology companies. For financial advisors, balancing opportunities created by the AI buildout against concerns around market concentration, valuations, and economic uncertainty has become one of the biggest portfolio construction challenges heading into 2027.

During our recent Q4 2026 US stock market outlook webinar, Dave Sekera, Chief US Market Strategist, and Preston Caldwell, Chief US Economist, shared Morningstar's latest views on equity valuations, interest rates, inflation, economic growth, and the evolving role of AI in the economy. They also discussed key risks facing investors, including slowing AI spending, rising Treasury yields, and persistent market concentration.

The Q&A highlighted many of the questions advisors are asking as they position client portfolios for the end of 2026 and beyond.

A: Morningstar's view is that a slowdown in AI-related investment could create headwinds for economic growth, but it would not necessarily lead to a severe recession. Preston Caldwell noted that the Federal Reserve still has significant room to lower interest rates if growth weakens, which could help support sectors such as housing and offset some of the decline in investment activity.

Caldwell explained, "I think even if we did have a recession, we'd be looking at more like what happened over 2001, 2002, which is a very mild recession."

For advisors, the implication is that a moderation in AI spending may slow economic activity, but policy easing could help cushion the impact.

A: Government debt concerns have become more prominent during the second half of 2026, but Morningstar believes they are not the primary reason yields have risen.

Caldwell said much of the increase in bond yields has been driven by stronger economic activity and AI-related investment, which has continued to support demand despite restrictive monetary policy. As he noted, "Most of the increase in yield for the U.S. at least this year has not been accounted for by its high level of government debt."

While advisors should continue monitoring fiscal risks and sovereign debt markets, Morningstar's view is that AI-driven economic activity remains a more important factor behind rising yields.

A: Morningstar continues to recommend a market-weight allocation to equities, but advisors were interested in understanding what could lead to a more defensive stance.

Dave Sekera explained that Morningstar's underweight call in early 2022 was driven by a combination of elevated valuations, rapidly accelerating inflation, slowing economic growth, rising long-term interest rates, and aggressive monetary tightening. While some of those challenges exist today, Morningstar believes they are far less extreme.

As Sekera said, “I don't see them getting to the point that we saw back in 2022."

For advisors, valuation remains a critical consideration. Although macroeconomic risks deserve attention, Morningstar believes current market conditions do not yet warrant an underweight position in equities.

A: Stock selection is becoming increasingly important. According to Morningstar's research, much of the market's undervaluation is concentrated in a small group of mega-cap technology and AI-related companies that Sekera refers to as the "Undervalued 7."

These companies account for a disproportionate share of the market's discount to fair value and continue to occupy leadership positions within the AI ecosystem.

"The ‘Undervalued 7’ just really dominate where we see value in today's marketplace,” Sekera explained.

For advisors, this reinforces the need to look beyond broad market exposure and assess where Morningstar's equity research identifies the most attractive opportunities.

A: Not necessarily. Caldwell explained that AI token prices should be viewed alongside improvements in model capabilities. When adjusted for quality, the cost of AI output has declined dramatically, making AI tools more accessible and potentially accelerating adoption across the economy.

As Caldwell stated,"The quality-adjusted price per token has collapsed by orders of magnitude in recent years."

Rather than indicating weakening demand, lower costs could help broaden AI usage, allowing more businesses and consumers to benefit from advances in the technology.

A: While AI is expected to contribute to productivity growth over time, Morningstar believes its economic impact is still developing. Caldwell pointed out that the labor market has not yet experienced the widespread displacement many investors expected from AI adoption.

Although some areas of the workforce are showing signs of pressure, particularly among younger college graduates, Caldwell explained, "I don't think AI has been the main driver of productivity growth yet."

For advisors, that means AI's long-term potential remains significant, but its effects on productivity, employment, and economic growth may unfold more gradually than current market narratives suggest.

A: When asked about SpaceX, Sekera distinguished between Morningstar's view of the company's business prospects and its valuation. While Morningstar remains positive on the company's long-term growth potential, the stock appears expensive based on current assumptions.

Sekera also highlighted the importance of monitoring future share lockup expirations, which could increase the amount of stock available for trading and potentially affect supply-and-demand dynamics. He noted, "While we do have a very positive view on the company and its growth rate, we think it's just significantly overvalued in today's marketplace."

For advisors evaluating highly visible growth companies, Morningstar's view is that strong fundamentals alone do not eliminate valuation risk.

The questions advisors raised during our Q4 2026 market outlook webinar reflected just how interconnected today's investing landscape has become. AI is influencing corporate spending, equity valuations, labor markets, interest rates, and economic growth, while a small group of mega-cap companies continues to drive an outsized share of market returns.  

At the same time, advisors are weighing the implications of elevated Treasury yields, ongoing inflation pressures, and the possibility of slower economic growth in the years ahead. Morningstar's view is that opportunities still exist across the market, but investors may need to look beyond broad market exposure and pay closer attention to valuation, diversification, and stock selection.  

Successful portfolio positioning may depend less on making broad market calls and more on understanding the forces reshaping the economy, particularly the role of AI and its impact on both businesses and financial markets.  

Tools like Morningstar Direct can help advisors identify opportunities across sectors, evaluate valuations relative to fair value estimates, monitor market concentration risks, and conduct deeper security-level analysis to support investment decisions.