Key Takeaways

• Industrial, consumer defensive, and energy stocks are leading the stock market higher in 2026 as technology names falter and investors look beyond the AI trade for returns.
• Within those sectors, stocks like Caterpillar, Walmart, and Exxon are benefitting from tailwinds stemming from the AI data center buildout, cost-conscious consumer spending, and rising oil prices.
• While the top stocks driving the rotation have notched double-digit gains this year, none are considered undervalued by Morningstar analysts.

A stock market rotation is well underway. Industrial, consumer defensive, and energy stocks are outperforming the broader market by a wide margin, offsetting losses in technology, communication services, consumer cyclicals, and even financials. As investors look for safety and stability outside of technology and artificial intelligence, “real economy” stocks (those that produce real-word goods and essential services) are pulling ahead of more speculative bets.

The industrials sector is responsible for 1.36 percentage points of the Morningstar US Market Index’s 0.93% gain this year through Feb. 18, according to Morningstar data. Caterpillar CAT and GE Vernova GEV have had the largest impact on the sector’s overall return.

Consumer defensives are up 13.3% and account for a 0.6-point boost to the total market, with Walmart WMT and Costco Wholesale COST leading that sector.

Energy stocks have seen even more dramatic gains and are up more than 22% since the start of the year. They have a smaller weighting in the US Market Index than industrials and consumer defensives, however, and account for a 0.64-point increase in the total market’s return. Within energy stocks, oil giants Exxon Mobil XOM and Chevron CVX have had the biggest impact.

All six of these names have seen double-digit returns this year, with Caterpillar (up 32%) seeing the most dramatic gains. But that performance also means that none of these are considered undervalued by Morningstar analysts. Here’s what investors need to know.

Industrials

Industrial stocks have gained more than 16% so far in 2026, with Caterpillar acting as the largest contributor. The stock is responsible for 1.9 percentage points (12%) of the sector’s performance. Morningstar analysts say Caterpillar is one of many companies set to benefit from the AI infrastructure buildout, noting that investor perception of the company has evolved now that its generators are being used to help power the data centers that house AI servers.

GE Vernova, an electric power firm that was spun off from General Electric in 2024, is responsible for 1 percentage point of the industrial sector’s return this year.

Caterpillar

“We agree with management about substantial tailwinds to its end markets as the global economy transitions to sustainable energy, allowing for GDP-plus growth for an extended period. As a result, the company is likely able to deliver mid- to high-single-digit growth over the next five-year period and is targeting 21%-25% operating margins as sales approach $100 billion per year.”

—George Maglares, analyst

GE Vernova

“GE Vernova has historically had market-leading positions in many of its business segments, such as gas power or US onshore wind. However, its margin profile has not matched this leadership position. As a standalone company with a sharper focus and with strengthening end markets, the firm is well-positioned to deliver material margin expansion in the years to come.”

—Brett Castelli, analyst

Consumer Defensives

With consumer spending slowing and many American households shifting toward more economical options at the grocery store, investors have turned to consumer defensive stocks, making them likely beneficiaries of the trend.

Walmart and Costco have had the largest impact on returns so far in 2026. Walmart’s 13.7% return accounts for 2.3 percentage points of the sector’s 13.3% gain for the year. Costco is up 15.7% over the same period and accounts for 2.1 percentage points of the sector’s overall performance.

Both stocks are rated 1 star by Morningstar analysts, meaning they are considered to be significantly overvalued. For cheaper picks in the sector, Morningstar chief US market strategist Dave Sekera likes Mondelez International MDLZ and Constellation Brands STZ, both of which are rated 4 stars.

Walmart

“Despite competition from Amazon, Shein, and Temu, we think Walmart’s scale, data, and supply chain investments offer structural advantages that should support long-term relevance and margin durability. With 4,600 US stores located within 10 miles of 90% of Americans, Walmart’s stores double as a logistics network, reinforcing its omnichannel cost edge.”

—Brett Husslein, analyst

Costco

“In the near term, we expect high-single-digit revenue growth, fueled by steady comparable sales, modest membership gains, and measured store expansion. The US remains its anchor market, with more than 600 warehouses generating annual sales of $320 million each and room for about 15 additional locations per year. However, we believe the firm’s most compelling growth opportunity lies abroad.”

—Brett Husslein

Energy

Energy is the best-performing sector so far this year, thanks in part to a roughly 12% spike in oil prices. Exxon is up 26% and is responsible for more than 7 percentage points, or about 32%, of the energy sector’s 21% return since Jan. 1. Morningstar analysts raised their estimate of the stock’s fair value to $142 per share from $129 earlier this month after the company released 2030 guidance indicating higher earnings and lower capital spending in the years ahead.

Meanwhile, Chevron has returned 21.8% and accounts for 3.4 percentage points of the sector’s total return. Morningstar analysts are watching for the company to increase production in Venezuela by about half over the next 18-24 months. Both stocks are rated 3 stars, meaning they are considered fairly valued.

Exxon Mobil

“Exxon is departing from industry trends by increasing spending relative to years past to deliver $25 billion in earnings growth by 2030. Although higher spending may seem alarming given the industry’s history of pursuing growth at the expense of returns, Exxon’s differentiated portfolio should enable it to pursue growth while maintaining capital discipline and delivering returns.”

—Allen Good, analyst

Chevron

“After an eventful year, Chevron enters 2026 on a strong footing, with low debt levels, a robust production growth outlook, and progress toward its $3 billion-$4 billion cost-reduction targets by year-end. As it reduces costs and adds high-margin production, it should deliver on its earnings growth and return improvement targets.”

—Allen Good