Whether referred to as the “Software Selloff” or the “SaaSpocalypse,” anticipated disruption from generative artificial intelligence has roiled markets. Companies whose business models are perceived to be at risk have seen their share prices decline sharply.
Morningstar Equity Research responded with a review of its
AI and Economic Moats: Which Stocks Are Most at Risk?
The changes affect the Morningstar Wide Moat Focus Index, which tracks wide-moat-rated US companies whose stocks trade at the lowest current market prices relative to estimated fair value. The report Morningstar Wide Moat Focus Index Performance and Ratings Changes Amid the “SaaSpocalypse” by Andrew Lane details the impact.
Changes to the US Wide-Moat Stock Universe
The index selects from wide-moat-rated constituents of the Morningstar US Market Index, which includes large-, mid-, and small-cap stocks. Moat rating changes resulted in a net reduction of eight stocks from Wide Moat Focus eligibility. There are now 169 US stocks with wide moat ratings, down from 177 before the equity research team’s review.
Ten downgrades from wide to narrow, two upgrades from narrow to wide, and all corresponding changes to companies’ fair value estimates are displayed below.
Changes to the US Wide-Moat Universe
How does the size of the selection universe compare with its historic norm? As depicted below, the number of wide-moat US stocks has trended up over time. Morningstar Equity Research has expanded coverage, prioritizing higher-quality companies. The recent downgrades do not dramatically change the size of the index’s selection universe.
The Selection Universe of Wide-Moat-Rated US Stocks Remains Ample
Gauging the Impact on the Wide Moat Focus Index
The Morningstar Wide Moat Focus Index selects 40 stocks at the time of reconstitution. Its current reconstitution, which goes into effect on March 23, 2026, will see stocks added and removed based on index construction rules.
While valuation considerations are the primary driver of index turnover, economic moat rating changes sometimes inform additions and removals to the Morningstar Wide Moat Focus Index as well. The December 2025 reconstitution saw one constituent added, LPL Financial LPLA, due to an upgrade to a wide moat. Two constituents were removed because they were downgraded from a wide moat to a narrow one: International Flavors & Fragrances IFF and Pfizer PFE.
Even if a constituent is added or removed at the time of reconstitution, it may take longer for it to disappear completely from the index. That’s because the Wide Moat Focus Index consists of two subportfolios, each containing 40 stocks. The subportfolios are reconstituted semiannually in alternating quarters on a “staggered” schedule. So, one subportfolio reconstitutes in March 2026, with the other reconstituting in June. At the time of reconstitution, constituents are equally weighted.
More Historical Perspective
This is not the first time Morningstar Equity Research has responded to a major market disruption with a broad-scale review of its economic moat ratings. According to Daniel Rohr, head of global equity research for Morningstar, there have been three prior occasions in the past 20 years that prompted a broad, ad hoc review of moat ratings: the 2007-09 global financial crisis, the 2014-15 collapse of oil and gas prices, and the 2020 covid-19 pandemic. However, more moat rating downgrades occurred in March 2026 than in any prior such review.
As for the Morningstar Wide Moat Focus Index, it has seen a variety of market environments and many changes to corporate competitive advantage since its February 2007 live inception date. Like any investment approach that diverges from the broad market, the index has gone through several periods of underperformance, including 2024 through early 2026. Yet, long-term excess returns relative to the broad US stock market validate Morningstar Equity Research’s moat ratings and valuation work.
