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Overvalued Market, Uneven Returns: Where to Look Next in 2026

By Charlie Tian
Dec. 3, 2025

The stock market delivered another strong performance this year, extending the solid gains seen in 2023 and 2024. As of Dec. 2, about 65% of S&P 500 companies are up year to date, while 35% are down.

However, a closer look reveals a very different picture beneath the surface. Only 161 companies—roughly 32% of the S&P 500—have outperformed the index itself. This can be seen in the chart below, where green boxes represent stocks that outperformed the S&P 500 and red boxes represent those that underperformed.

 

Date: Dec. 2, 2025. Source: GuruFocus.com

Importantly, the outperformance has not been evenly distributed across sectors. Fueled largely by optimism around artificial intelligence, technology stocks account for a disproportionate share of the winners. By contrast, stocks in sectors such as energy, real estate, consumer defensive, and even financial services have mostly lagged the broader market.

After three consecutive years of above-average returns, market valuations have become stretched. By virtually every major metric—including the Buffett Indicator, Shiller P/E and GuruFocus Value.—the market now appears overvalued. This raises a critical question for investors: Where should we invest from here?

Once again, the Shiller P/E ratio offers useful clues. Below are the Shiller P/E ratios alongside traditional P/E ratios for the 11 sectors of the S&P 500, which help highlight where valuations may still be relatively reasonable—and where risks may be elevated.


Sector Number of Stocks Shiller P/E Regular P/E
Financial Services 69 21.2 17.5
Energy 22 25.7 17.5
Basic Materials 20 26.6 30.4
Consumer Defensive 37 27.6 30.0
Healthcare 60 30.3 28.8
Utilities 31 31.2 21.1
Industrials 72 32.1 28.2
Real Estate 31 42.3 48.5
Communication Services 24 46.6 26.6
Consumer Cyclical 54 50.8 35.3
Technology 82 64.9 40.5
S&P 500 500 39.6 29.1

Date: Dec. 2, 2025. Source: GuruFocus.com

Clearly, the technology sector stands out as the most expensive by both Shiller P/E and traditional P/E measures. In contrast, financial services and energy remain among the more attractively valued sectors relative to the broader market. 

In this environment, selecting individual stocks becomes more important than relying on broad market index investing.



About: Charlie Tian, Ph.D. is the founder and Chief Executive Officer and portfolio manager of GuruFocus Investments, LLC, an SEC-registered investment management firm.

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