This pick list highlights constituents of the Morningstar US Mid Cap Index that we believe offer investors the best risk-adjusted return prospects. The market capitalization range for U.S. mid-caps typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market.

PG&E Corp. is the holding company for Pacific Gas & Electric Co., an investor-owned utility. The utility provides electricity to 5.5 million accounts and natural gas to 4.5 million accounts in northern and central California. Electricity accounted for about 71% of 2023 revenues. The company's customer base is weighted toward residential and small business customers. In 2023, 43% of GWh sales was from residential customers, and 37% was from smaller commercial customers. About 80% of 2023 bundled gas sales was from residential customers. PG&E is also a large operator of underground natural gas storage fields in California. As of the end of 2023, the utility had 26 GWh of generating capacity, with an owned generation fuel mix including 25% from natural gas, 15% hydropower, 2% renewable, and 58% nuclear. Purchased power is 35% renewably sourced. The company had planned to shut down the Diablo Canyon nuclear plant by 2025 as management said that it could not afford to run the plant. However, regulators supported the plant, and PCG has now applied for a license and federal aid to continue to operate Diablo Canyon. PG&E was added to the S&P 500 in 3Q22 after it had met the requirements for inclusion. Its market cap is $38 billion.

Sector Leadership Realigns in an Uncertain Period April was an 'average year' for stocks. That means, of course, it was a spectacular month. The S&P 500 rose 10.4% in April, in line with the average 10.6% full-year gain on the index since 1980. So far, May has carried that momentum forward, advancing 2.6% as of the 5/8/26 close. Uneasy truces hold (for the most part) between the U.S. and Iran and between Israel and Lebanon. With the White House rejecting Iran's response to the latest U.S. peace proposal, the truces look increasingly frayed as sporadic attacks from both sides intensify. But, so far, that has not stopped the stock market. The first-quarter 2026 U.S. stock market continued the pattern of the second half of 2025, in that leadership had rotated away from growth and was dispersed across defensive (Consumer Staples), cyclical (Industrial), interest-rate-sensitive (Utilities, Real Estate), and inflation hedges (Energy, Materials). With the second quarter not quite halfway done, the growth sectors of Information Technology, Consumer Discretionary, and Communication Services have come roaring back. Growth Sectors Rallying in 2Q26 For 2Q26 to date, the S&P 500 has rocketed higher by 13%. That eye-popping number actually understates performances from some of the sector and industry leaders. The Information Technology sector is up 31% in 2Q26 to date. That is not far off the 36% gain for Energy in 1Q26 -- but IT has jumped more than 30% in less than half a quarter. Semiconductors have been in the lead, with the SOX index rising over 35% in the past month and rising over 50% in the second quarter to date. Software, badly beaten up in 4Q25 and 1Q26, is up 17% in 2Q26 to date. The next-best sector in 2Q26 has been Consumer Discretionary, which is up just over 10% as of 5/8/26. Amazon, which dominates the retail stocks in this sector, has been surging as AWS generates accelerating growth and margin expansion on AI momentum with Anthropic, OpenAI, and others. The other growth sector, Communication Services, has had a more-muted performance but still has gained 5.5% in 2Q26. Four stocks dominate this sector: Alphabet and Meta Platforms on the social media side, and Verizon and AT&T on the legacy telecom side. Alphabet has been strong thanks to successful AI initiatives, but Meta Platforms has struggled with its AI bets. The big telcos are delivering solid total return with their high dividends, but are not much associated with the AI revolution. The rotation winners of 3Q25 through 1Q26 have not rolled over; in fact, the overall market has been strong enough in 2Q26 to keep most sectors moving forward. Real Estate, which struggled in recent years as high interest rates limit new property investments, is up about 8% in 2Q26. The overall interest-rate environment has not improved, but pent-up demand is helping leasing activity. Other mid-single-digit gainers in 2Q26 include Industrials (up 7%), Materials (up 5%), Financial (up 4%), and Consumer Staples (up 2%). Sectors that are negative so far in 2Q26 include Healthcare (down 2%), Utilities (down 3%), and Energy (down 9%). Healthcare came into 2026 riding a wave of optimism as President Trump signed deals designed to bring down prices and hopefully stimulate business. But strained consumers are foregoing elective medical procedures and are even skipping going to the doctor. Utilities have been a winning sector since the Fed began its rate-cutting cycle over two years ago. As the outlook dims for further fed rate cuts, profit-taking in income stocks may be funding rotation back into AI and semiconductor names. Energy soared 36% in 1Q26, which included a 20% surge in January and February before the first shots were fired in Iran. Energy is down about 9% in 2Q26. While oil and derivatives prices remain near multi-year highs, they have bounced around on optimism that a lasting truce can be reached and the Strait of Hormuz can be reopened. Even if the war ends soon, oil prices are likely to remain elevated for months as supply and demand gradually normalize. Investors betting on a quick resolution to the war and an oil-price drop are being accused of replacing forecasting with 'wishcasting.' If oil prices do not come down rapidly, the market is assuming energy prices have reached their highs for the year. Year-to-Date Sector Map Also Shifts While April and May have been go-go for growth, the full-year sector performance map also captures a first quarter in which growth was back on its heels. The three growth sectors represent over 50% of S&P 500 sector weight -- and when they are all down, the overall market tends to be down. The S&P 500 declined 4.6% in 1Q26. With the second-quarter surge, the index was up 8.1% for the year to date as of the 5/8/26 close. Among the 11 sectors in the S&P 500, two sectors are clearly down for the 2026 year-to-date and one is bobbing right around breakeven. Communication Services is down less than half a percentage point for 2026 as it follows a 6% first-quarter decline with a 5.5% second-quarter gain. The Financial sector appreciated in mid- to high-single-digit percentages in 2025 and 20204 as net interest margins widened and as the environment for fee-based businesses gradually improved. The sector is down 5% in 2026 to date on fears (not yet realized) that rising inflation will slow load demand and worsen an already depressed housing market. The Healthcare sector has been struggling and getting smaller in S&P sector weight in recent years. In addition to a slowing in consumer medical-procedure utilization, the pipeline of promising new drug candidates is full of GLP-1 variations, but somewhat sparse otherwise. Sectors that are up in single-digit percentages in 2026 to date, in ascending order, include Consumer Discretionary (up 1%), Utilities (up 4%), Industrial (up 6%), Consumer Staples (up 8%), and Real Estate (up 9%). Three sectors are up in double digits for the year to date. In ascending order, these are Information Technology (up 19%), Materials (up 20%), and Energy (up 24%). Energy and Materials carried significant momentum from 1Q26, whereas Information Technology has been the comeback kid after ending 1Q26 down 9%. Conclusion The stock market has been news-driven in 2026 -- particularly since the war with Iran began. At times, it can seem like stock selection is all 'Hormuz, Hormuz, Hormuz' vs. 'AI, AI, AI.' That makes it hard to predict which sectors will lead as the trading year progresses. But stocks across a range of sectors have been working higher on solid fundamentals that have little to do with events in the Middle East. The calendar 2026 first-quarter earnings season, which is now winding down, has so far featured 25%-plus EPS growth. That's the best growth since the quarters coming out of COVID-19 economic disruption. Putting aside huge one-time gains from three of the 'Magnificent Seven' companies, earnings for calendar 1Q26 have featured notable gross-margin improvement on company efficiencies and supply-chain normalization. Earnings have also benefited from revenue growth that has exceeded any inflation impacts. Consumer spending has rarely been so lopsided, with strains on lower-income consumers worsening. The University of Michigan consumer sentiment index for May 20206 was 48.2% -- the lowest reading in the 70-year-plus history of this series. For now, upper-tier consumers are keeping overall consumer spending healthy, which is helping keep employment trends positive. These positive conditions could melt away if the situation in Iran evolves into a permanent stasis in which the Strait of Hormuz remains closed or only partly open and hostilities continue at a low level. Economic shocks have a lagged effect, and oil price inflation will take one or more quarters to ripple fully through consumer and business prices. The grinding effects of worsening inflation could restrain spending by even well-to-do Americans. In the stock market, some of the recent sector and industry momentum, particularly in semiconductors, does not appear sustainable. We will continue to monitor the dynamic situation in Iran, while also keeping an eye on all parts of the economy.

This pick list highlights constituents of the Morningstar US Mid Cap Index that we believe offer investors the best risk-adjusted return prospects. The market capitalization range for U.S. mid-caps typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market.