5 Stocks to Buy Before the Market Rally Stalls I October 20, 2025

Here's a comprehensive summary of the YouTube video transcript:

Key Concepts

• Tariffs and Trade Wars: Uncertainty surrounding US-China trade relations and their impact on the market.
• Economic Indicators: September CPI data and market expectations.
• Federal Reserve Policy: Market pricing for interest rate cuts.
• Company Earnings: Analysis of upcoming earnings reports for Tesla, Netflix, Intel, Lockheed Martin, Northrop Grumman, Danaher, and Thermo Fisher Scientific.
• Morningstar Research: Insights on bank earnings (big banks and regional banks), and tech stocks (TSMC, ASML, Salesforce).
• Investment Strategy: "Wait and see" approach to market volatility, looking through noise for long-term investors.
• Stock Valuation: Morningstar's star ratings (1-5 stars), fair value estimates, premiums/discounts, and economic moats.
• Stock Picks: Dave Sakara's recommendations for undervalued stocks with defensive qualities and upside potential.

Market Outlook and Economic Indicators

Tariffs and Market Reaction

Dave Sakara, Morningstar's Chief US Market Strategist, discusses the ongoing posturing and positioning between the US and China regarding tariffs. He advises investors to adopt a "wait and see" attitude, emphasizing that it's too speculative to adjust investment theses until a definitive agreement is reached. Sakara notes that trying to trade headlines has historically led to buying high and selling low. He suggests that President Trump often starts with an extreme stance to gain leverage in negotiations.

September CPI Data

The September Consumer Price Index (CPI) data is expected to show a 0.4% increase month-over-month for headline CPI, remaining flat from the previous month. Year-over-year, headline CPI is projected to tick up to 3.1%. Core CPI is expected to be flat month-over-month at 0.3% and also flat year-over-year at 3.1%. Overall, not much change is anticipated.

Federal Reserve Rate Cut Expectations

The CME Fed Watch tool indicates a 100% probability of a rate cut at both the current and December Federal Reserve meetings. This would bring the federal funds rate to a range of 3.75% to 4% by the end of the year.

Upcoming Earnings Reports

Tesla (TSLA)

Two key items to watch for Tesla's earnings are:

1. Robo Taxi Timeline: Market enthusiasm for robo taxis has driven the stock's rally. Management's guidance for a full product launch next year will be scrutinized.
2. Lower-Priced Models: Updates on the ramp-up and long-term production targets for sub-$40,000 Model Y and Model 3 variants are crucial.

Morningstar believes the market is overestimating Tesla's earnings growth, viewing it more as an AI stock than an operating company. The stock trades at a 70% premium to Morningstar's fair value, placing it in two-star territory (overvalued). However, Sakara cautions against shorting the stock.

Netflix (NFLX)

Netflix trades at a 60% premium to Morningstar's fair value, earning it a one-star rating due to its uncertainty. The stock's gains this year occurred in the first half, and it has been trading in a narrow range since. Stronger growth dynamics are needed for further rallies. The company has already benefited from password sharing crackdowns and ad-supported subscriptions. Morningstar analysts expect growth to slow in 2026. The stock trades at approximately 29 times 2025 earnings forecasts, making it susceptible to a significant price gap down on any disappointment.

Intel (INTC)

Intel is a two-star rated stock trading at a 34% premium. Morningstar raised its fair value estimate to $28 per share following the US government's equity investment and the collaboration announcement with Nvidia. This collaboration aims to jointly develop custom data center and PC products, potentially helping Intel slow market share losses to AMD by integrating Nvidia RTX GPUs into PC CPUs. However, Morningstar believes the market price has outpaced fundamentals, as Nvidia has not committed to shifting GPU production to Intel Foundry. Intel still faces significant capital expenditure needs to catch up technologically.

Defense Contractors: Lockheed Martin (LMT) and Northrop Grumman (NOC)

• Lockheed Martin: Investors will look for updated commentary on the pace of F-35 orders. While a slowdown in deliveries is possible, an overall reduction in orders is not anticipated.
• Northrop Grumman: Similar to Lockheed Martin, commentary on order pace is key.

Both companies have seen their stocks weaken since early October. Concerns include potential reductions in defense spending from Europe and the impact of a truce between Israel and Hamas or a resolution in the Ukraine war. However, Morningstar believes these factors would have only marginal impacts on earnings, as the need to rebuild munition inventories and the long-term drivers of defense stocks (multi-year weapons platforms) remain strong.

Morningstar analyst Nick Owens noted that US Treasury Secretary Yellen commented negatively on defense contractors repurchasing stock, suggesting they should invest in R&D instead. From a shareholder perspective, both stocks are trading close to fair value, so buybacks or R&D spending would not significantly alter intrinsic valuations.

Both Lockheed Martin and Northrop Grumman were previously four-star rated picks. Lockheed Martin is currently a three-star rated stock, and Northrop Grumman is also a three-star rated stock.

Healthcare Sector: Danaher (DHR) and Thermo Fisher Scientific (TMO)

No specific catalysts are expected from these earnings reports; the focus is on execution and in-line results. Commentary on budget constraints for research-related life science tools and consumables will be monitored, as this has impacted these stocks previously.

• Danaher: Provided a solid outlook for 2025 in April. Last quarter's revenue was in line with guidance, operating margins were better than expected, and earnings per share guidance was increased by $0.10 to $7.70-$7.80. In-line results and guidance should bolster market sentiment.
• Thermo Fisher Scientific: Delivered decent second-quarter results and increased full-year revenue and profitability guidance. Similar performance is expected.

Both are currently four-star rated stocks. Danaher trades at a 22% discount, and Thermo Fisher Scientific trades at a 15% discount. Both have a wide economic moat and medium uncertainty. Investors might consider waiting for earnings reports to assess any changes to long-term assumptions before investing, as even a small pop would likely leave them undervalued.

Morningstar Research Insights

Bank Earnings

Big Banks: No surprises were reported; conditions are favorable for banks.

• Fed Easing: Lower short-term funding costs.
• Interest Rates: Downward trend in long-term rates bolsters fixed-income security values.
• Yield Curve: Expected steeper yield curve due to short-term rates falling faster than long-term rates, leading to wider net interest margins and higher earnings.
• Economic Growth: Slowing but no recession expected, keeping defaults and bankruptcies low, thus maintaining low loan loss reserves and charge-offs.
• Other Businesses: High trading, underwriting, and fee income revenues; investment banking revenue is picking up.

However, all these positives are priced into valuations. JP Morgan, Wells Fargo, Bank of America, and Citigroup are all two-star rated stocks trading at premiums (20%, 16%, 11%, and 18% respectively). Citigroup, once trading below tangible book value, is now almost as expensive as JP Morgan.

Regional Banks: Concerns about bad loans led to selling.

• DBRS (Morningstar's credit rating subsidiary): Reported more downgrades than upgrades and a need for capital infusions in private debt markets.
• Defaults and Bankruptcies: Significant losses are expected for lenders involved in the defaults of Color and First Brands. Collateral for Color may have been used by multiple lenders.
• Jefferies: Caught up in the First Brands situation. The stock is down 28% from September highs and now trades at widened credit spreads.
• Zions and Western Alliance Bank: Zions announced a $50 million charge-off due to fraud. Western Alliance filed a lawsuit against a borrower for fraud involving $100 million.
• Confidence: The banking business relies on confidence; a loss of confidence can quickly lead to funding and liquidity drying up.

These three names (Jefferies, Zions, Western Alliance) are stocks to watch. While stocks bounced on Friday, a resumption of their slide would be a red flag for regional banks and their credit risk exposures.

US Bank: Morningstar's favorite regional bank, the largest one.

• Strong Q3: Solid revenue growth and expense control led to a 17% increase in net income. Net interest margin expanded by nine basis points and is expected to expand further with Fed rate cuts.
• On Track: The company remains on track for its medium-term targets on return on tangible common equity and efficiency ratios.
• Undervalued: Despite strong performance, the market seems to overlook US Bank, likely because it's too large to be a mega-cap bank but too big to be considered a typical regional bank. It trades at a 15% discount, earning it a four-star rating and a 4.4% dividend yield. Institutional investors may rotate from overvalued mega banks into US Bank.

Tech Stocks

Taiwan Semiconductor (TSM)

TSMC reported strong results and raised revenue guidance to mid-30% from low 30%. The stock's pullback after earnings is attributed to the market expecting a larger "beat and raise." The stock is up 30% since early September and over 50% year-to-date. Previously a five-star rated stock at $60 in October 2022, it now trades around $300 and is a three-star rated stock, trading at fair value. No action is recommended from an undervaluation perspective.

ASML

ASML's stock has been volatile but offers opportunities to manage positions by taking profits on rallies and reloading on pullbacks. It was a four-star pick in October 2023, rose to two-star territory in March 2024 (a good time to harvest profits), fell back to four-star territory in October 2024, and is now back in three-star territory. Results were fine, with analysts noting ongoing weakness in China expected to impact the company further in 2026, but strength elsewhere is expected to offset this. Long-term forecasts remain unchanged. The stock is up about 50% this year and is considered fully valued, trading at 34 times 2026 earnings and 29 times 2027 earnings. It's recommended to keep on a watchlist for pullbacks.

Salesforce (CRM)

Salesforce's investor day led to a significant stock pop, but some institutional selling occurred, causing the stock to give back half of its gains. The company focused on artificial intelligence, specifically its "Agentforce 360" AI platform. Salesforce increased its revenue target for 2030 to $60 billion (vs. Morningstar's $56.5 billion forecast), implying a 10% compound annual growth rate (CAGR) compared to Morningstar's 8.2%. There's potential upside to Morningstar's earnings growth forecast (currently 11% CAGR). If Morningstar were to use Salesforce's revenue and earnings expectations, there would be a 15% upside to its current fair value. However, Morningstar is holding steady with its long-term assumptions. The stock remains a four-star rated stock with a 25% discount, making it one of the few undervalued tech stocks, likely underfollowed due to the current focus on AI hardware.

Insurance Industry

Progressive (PGR), Travelers (TRV), and Marsh & McLennan (MMC) stocks fell after earnings. These companies have generally been considered overvalued.

• Progressive: Down 22% from its June high, rated two stars, trading at a 19% premium.
• Travelers: Down 9% from its recent high, rated two stars, trading at a 12% premium.
• Marsh: Down 22% from its April high, now rated three stars.

The investment thesis for insurers was that they benefited from high price increases. However, pricing is expected to normalize in this competitive business, leading to current stock pressure.

Dave Sakara's Stock Picks

Sakara's picks aim to balance resilience during downturns with upside potential in bull markets, trading at a margin of safety. He screened for four and five-star rated stocks with wide or narrow economic moats and low or medium uncertainty ratings, preferring larger caps but considering mid/small caps in defensive sectors.

1. Microsoft (MSFT)

• Rating: Four-star
• Discount: 14% to fair value
• Uncertainty: Medium
• Moat: Wide, with multiple sources (network effects, switching costs, intangible assets, cost advantages, efficient scale).
• AI Leverage: Well-positioned to benefit from AI growth.
• Downside Protection: Beta of 0.9 suggests less volatility than the market. Rotation into medium uncertainty stocks in risk-off scenarios is expected.
• Catalyst: Increased capital expenditures on cloud infrastructure for AI in the first half of the year, with expectations for accelerated growth in the second half and potential guidance increases.

2. Deere (DE)

• Rating: Not explicitly stated, but implied to be attractive for forward expectations.
• Valuation: Trades at 26 times current year's earnings, expected to drop to 16 times 2026 earnings as normalized revenue generation improves.
• Business Cycle: Currently in a natural down cycle due to pandemic-driven pull-forward demand in 2021-2023, government infrastructure spending, and softer commodity prices.
• Forward Expectations: Revenue projected to drop 19% in 2024 and 13% in 2025, with normalized sales generation expected to begin in 2026. Analysts anticipate an 8% CAGR on the top line thereafter.

3. Huntington Ingalls Industries (HII)

• Rating: Four-star
• Discount: 14%
• Dividend Yield: 1.9%
• Uncertainty: Medium
• Moat: Wide
• Business: Largest independent US military shipbuilder, sole provider of nuclear aircraft carriers and amphibious landing ships, and one of two producers of nuclear submarines.
• Investment Thesis: The stock was hit by charges against its nuclear submarine business due to inflation and supply chain issues on older contracts. As these contracts roll off and new ones are negotiated, profitability is expected to return, with potential government acknowledgment of prior losses.
• Margins: Expected to expand from 5.2% in 2024 to 6.3% in 2025 and 8.6% by 2029.
• Valuation: Trades at 19 times current year's earnings, dropping to 16 times next year's earnings.

4. Medtronic (MDT)

• Rating: Four-star
• Discount: 14%
• Dividend Yield: 3%
• Uncertainty: Medium
• Moat: Narrow (switching costs, intangible assets)
• Thesis: The stock has been undervalued for a while and is up 22% this year. Morningstar first recommended it in June 2023. Medtronic is well-positioned to benefit from the aging baby boomer generation and potential rotation into the healthcare sector and value stocks.
• Growth: Modest assumptions of 5% CAGR topline growth for the next five years, with earnings growth slightly over 7% CAGR.
• Valuation: Trades at 17 times current year's earnings and 16 times next year's earnings, considered attractive.

5. Hershey (HSY)

• Rating: Four-star
• Discount: 11% (sufficient for four-star due to low uncertainty)
• Dividend Yield: 2.9%
• Uncertainty: Low
• Moat: Wide (cost advantages, intangible assets)
• Challenge: High cocoa prices have impacted margins. Cocoa prices have doubled, tripled, or quadrupled due to droughts and disease in West Africa, which accounts for 60% of global production. Cocoa is a significant cost component (20-50% of COGS).
• Outlook: High prices are expected to lead to demand destruction and new supply emergence over the next 1-2 years. Cocoa prices are showing signs of subsiding.
• Valuation: Adjusted EPS guidance for 2025 is $5.81-$6.00, implying a P/E of about 31 times at the midpoint. However, 2024 earnings were $9.37, and 2026 earnings are forecast at $8.50 (bringing P/E to 22 times), with a return to $9.57 in 2027 (P/E under 19 times). The average P/E over the past decade is in the mid-20s. At a 25x multiple on 2027 earnings, the stock could reach $240. The stock is not trading at a huge discount but offers upside as cocoa prices decline, with a solid dividend yield.

Conclusion

The discussion highlights a market characterized by ongoing geopolitical uncertainties (tariffs) and a Federal Reserve poised for interest rate cuts. Investors are advised to maintain a long-term perspective and look through short-term noise. Morningstar's research provides detailed analysis of various sectors, emphasizing the importance of valuation, economic moats, and uncertainty ratings. The stock picks offer a blend of established companies and those with specific catalysts, aiming for a balance of defensiveness and growth potential. The segment concludes with a reminder to subscribe and tune in for future episodes.