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.
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.
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%.