Morningstar sector director Sean Dunlop has identified LPL Financial Holdings Inc., Fiserv Inc., and Nu Holdings Ltd. as his top financial services picks, arguing the market has overreacted to sector-wide concerns. He described 2026 as a "forgettable year" for the industry, noting that broader U.S. equity indices have hit fresh highs while the financial sector has significantly underperformed.
Dunlop attributes the sector's lag to fears of artificial intelligence disruption and rising interest rates. He noted that "stubbornly higher inflation" led the Federal Reserve to raise interest rates for the first time since 2023 in September, adding pressure to an already strained environment. The Financial Select Sector SPDR Fund (XLF) has gained just 0.76% year-to-date, compared to a nearly 14% increase for the SPDR S&P 500 ETF Trust (SPY). Morningstar does not see this trend reversing anytime soon, though Dunlop believes investors have been too harsh on these three specific companies.
For LPL Financial Holdings, Dunlop pointed to progress toward returning to mid- to high-single-digit organic net new asset growth after an early-2026 selloff. He stated the company must either introduce a credible alternative monetization strategy for client sweep cash or demonstrate that AI-enabled cash management risks are not material. Client sweep cash currently represents 30%-35% of LPL's gross profit. Morningstar prices LPLA stock at $543, implying nearly 68% upside from its last close.
Regarding Fiserv, Dunlop characterized 2026 as a "reset year" where the market overreacted to recent difficulties. He believes Fiserv retains a competitive moat through scale-driven cost advantages in merchant acquiring and issuer processing, as well as high switching costs in its bank technology operations. The analyst highlighted opportunities for Fiserv's cloud-based platform, Clover, to monetize small and medium business clients. With projections calling for mid-single-digit top-line growth and stable margins, Dunlop views the current valuation as overly pessimistic given the company's double-digit free cash flow yield. Morningstar has a $106 target for FISV stock, suggesting about 130% upside.
On Nu Holdings, the analyst noted that Nubank has rapidly become Brazil's largest online banking service provider due to its profitability and lean operating structure. The firm plans to extend its growth by exporting to other Latin American markets and the United States. Dunlop argued that shares overcorrected in the first half of 2026 following rising unemployment and higher inflation in Brazil. Although the stock has partially recovered, he believes it still trades below fair value because the market is heavily discounting lingering credit quality concerns. Morningstar maintains a $16.60 target for NU stock, implying about 11% upside.
Retail sentiment on Stocktwits was neutral for LPLA and FISV, but bearish for NU. All three stocks were declining in the overnight session late Wednesday.