Despite Wall Street’s fascination with AI-driven gains, underlying economic signals reveal a more fragile scenario for everyday consumers. While headline data suggests resilience, much of the economy is running at a far slower pace.
Discount retailers like Dollar Tree and Dollar General — among the best-performing stocks of 2025 — are thriving this year mainly because households across income levels are feeling the pinch. Trump tariffs, leading to increased costs and a weaker job market, can be held responsible for this subdued economic scenario.
Higher-income consumers are opting for lower-priced options while middle- and lower-income families are relying more heavily on low-cost essentials. Wage growth has softened, hiring has cooled, and consumer sentiment remains somewhat muted, pointing to an affordability issue that contradicts the market’s AI-led optimism.
Why Value Stocks Make Sense in This Environment
Given this uneven economic backdrop, value stocks tend to perform better. These companies normally operate in sectors with stable demand — such as consumer staples, utilities, and health care — making their earnings more predictable even when economic conditions deteriorate.
Is Overvaluation a Concern?
With volatility rising and Wall Street valuations flying high, investors may want to shift toward strategies offering steady cash flow and better business prospects going into the New Year. Overvaluation in AI stocks has been bothering investors for quite some time now. The Nasdaq logged its first monthly loss in November since March, as quoted on the Wall Street Journal.
The S&P 500 Index traded at a price-to-earnings ratio of 29.21 on Dec. 5, 2025, according to GuruFocus. Historically, the S&P 500 P/E ratio reached a record high of 131.391 and a record low of 5.31, with the median value of 17.986, per GuruFocus. This shows that the S&P 500 is currently trading at a higher P/E than its Median value.
Meanwhile, SPDR S&P 500 ETF Trust SPY currently trades at a price-to-earnings (P/E) ratio of 27.29X. P/E ratio of the ETF’s 10-year range remains within 17.2X-32.8X. Given the 20X median P/E ratio (10-year) of SPY, we can conclude that the current valuation is pricey. Hence, digging into undervalued stocks and ETFs would be a great idea going into 2026.
Against this backdrop, below we highlight a few ETFs that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold), P/E (36 months) less than 27X and past-month price gains of at least 5%.
Undervalued High-Momentum ETFs in Focus
State Street SPDR S&P Bank ETF KBE – Zacks Rank #1; P/E: 11.29X; One-month price gain: 5.2%
The underlying S&P Banks Select Industry Index is a modified equal-weighted index that seeks to reflect the performance of publicly traded companies that do business as banks or thrifts. The ETF charges 35 bps in fees.
State Street SPDR S&P Retail ETF XRT – Zacks Rank #3; P/E: 15.25X; One-month price gain: 7.4%
The underlying S&P Retail Select Industry Index represents the retail sub-industry portion of the S&P TMI. The ETF charges 35 bps in fees.
State Street SPDR S&P Pharmaceuticals ETF XPH – Zacks Rank #3; P/E: 10.25X; One-month price gain: 16.9%
The underlying S&P Pharmaceuticals Select Industry Index represents the pharmaceuticals sub-industry portion of the S&P Total Markets Index. The ETF charges 35 bps in fees.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
SPDR S&P 500 ETF (SPY): ETF Research Reports State Street SPDR S&P Retail ETF (XRT): ETF Research Reports State Street SPDR S&P Bank ETF (KBE): ETF Research Reports State Street SPDR S&P Pharmaceuticals ETF (XPH): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
