According to Morningstar’s Sean Dunlop, financial services have lagged in 2026 due to AI-disruption fears and rising interest rates.
- The firm believes the sector’s tough year will continue and does not “see the trend reversing anytime soon.”
- The Financial Select Sector SPDR Fund has gained just 0.76% year-to-date, while the SPDR S&P 500 ETF Trust has surged nearly 14% higher in the same time.
- However, the analyst said the market has likely overreacted to three stocks in the sector: LPL Financial Holdings, Fiserv, and Nu Holdings.
In 2026, U.S. equities have had a solid run, with the S&P 500, Nasdaq and Dow Jones hitting fresh highs despite geopolitical and economic uncertainty. However, the financial sector has largely underperformed the broader market.
According to Morningstar’s Sean Dunlop, sector director of financial services equity research, three names: LPL Financial Holdings Inc. (LPLA), Fiserv Inc. (FISV), and Nu Holdings Ltd. (NU) are outliers. He named these as his top sector picks.
Why Financials Have Underperformed The S&P 500
According to Dunlop, financial services have lagged because of fears of AI disruption and rising interest rates.
“It has been a forgettable year for financial services companies, with rippling concerns about artificial intelligence disruption weighing heavily on share prices” for various financial services firms, he said in a post. “Even banks saw a (short-lived) selloff as investors continued grappling with a shifting competitive environment.”
Meanwhile, “stubbornly higher inflation” led the Federal Reserve to raise interest rates for the first time since 2023 in September, further increasing pressure on the sector and leading to a “significant underperformance” relative to the broader market.
The Financial Select Sector SPDR Fund (XLF) has gained just 0.76% year-to-date, while the SPDR S&P 500 ETF Trust (SPY) has surged nearly 14% higher in the same time.
The firm believes the sector’s tough year will continue and does not “see the trend reversing anytime soon.”
The Outliers: LPLA, FISV, NU Stocks
Despite seeing the sector as overvalued, the analyst believes that the market “has likely overreacted” in the case of LPL Financial Holdings, Fiserv, and Nu Holdings.
Dunlop explained in his post that after an early-2026 selloff, LPL Financial has made progress toward returning to mid- to high-single-digit organic net new asset growth. However, the analyst noted that the company will need to “either introduce a credible alternative monetization strategy for client sweep cash, which represents 30%-35% of gross profit today but is perceived to be at risk from AI disruption, or else exhibit signs that the AI-enabled cash management risk is a non-issue.”
Morningstar has priced LPLA stock at $543, implying nearly 68% upside from its last close.
Meanwhile, the analyst said that although Fiserv faces significant issues, 2026 has been a “reset year,” with the market having overreacted to its recent difficulties. “We think the company retains a moat on both sides of its business, with a scale-driven cost advantage for its merchant acquiring and issuer processing businesses, and its bank tech operations enjoying high switching costs,” Dunlop said.
He added that the company’s cloud-based point-of-sale and business management platform, Clover, has ongoing opportunities “to monetize its SMB clients and shows it can adapt successfully to industry changes,” noting that the company could stabilize its operations. He said that the company’s projections “call for mid-single-digit top-line growth and stable margins in the future. With shares trading at a double-digit free cash flow yield, we see the market valuation as overly pessimistic.”
Morningstar has a target of $106 on FISV stock, implying about 130% upside from its last close.
On Nubank, the analyst noted that the digital financial services company has “rapidly become Brazil’s largest online banking service provider, thanks to its industry-leading profitability and lean operating structure.” Dunlop noted that the firm plans to extend its growth profile by exporting to other Latin American markets and the United States. “We think the shares overcorrected in the first half of 2026 after rising unemployment and higher inflation in Brazil sent them spiraling. While the shares have partially recovered, they still trade below our fair value estimate, as we believe the market is discounting them too heavily for lingering credit quality concerns,” he said.
Morningstar has a target of $16.60 on NU stock, implying about 11% upside from its last close.
Retail Stance: LPLA, FISV, NU Stocks
On Stocktwits, retail sentiment around LPLA and FISV was ‘neutral,’ while it was ‘bearish’ for NU.
All three stocks were declining in the overnight session late Wednesday.
For updates and corrections, email newsroom[at]stocktwits[dot]com.<