S&P 500 Looks Overpriced but Hidden Value Stocks Still Shine

The S&P 500 has surged nearly 80 percent in less than three years, but some seasoned investors argue the best opportunities may still be hiding in plain sight.

Market at Record Highs Raises Big Questions

Since the bear market bottom in October 2022, the S&P 500 has delivered a stunning rebound. It returned 26 percent in 2023, another 25 percent in 2024, and has added nearly 14 percent so far in 2025. This represents one of the strongest three-year runs in the history of the index.

But such rapid gains have pushed valuations to rare heights. The CAPE ratio, which measures stock prices against inflation-adjusted earnings over the past decade, has risen above 40 for only the second time on record. The forward price-to-earnings ratio for the index sits at 22.6, a level last seen during the dot-com bubble. Meanwhile, the Buffett Indicator, which compares the total market value to U.S. GDP, has hit a historic peak.

By almost any traditional measure, the U.S. stock market looks expensive. The question is whether opportunity still exists beneath the surface.

Big Tech Is Dominating the S&P 500

The structure of the S&P 500 today looks very different compared to a few years ago. According to Yardeni Research, the top eight megacap companies now make up about one-third of the entire index, up from 15 percent in 2018. The top 10 companies control nearly 40 percent of its value.

These firms, mostly tech giants, boast high valuations but also deliver earnings growth that supports those lofty multiples. Investors like Howard Marks acknowledge that their profits justify premium pricing. Yet the dominance of these companies has lifted the overall market’s valuation, pulling up many weaker firms that do not share the same earnings power.

This concentration leaves the index more vulnerable to swings in a small group of companies. When the top firms stumble, the broader market feels the impact.

Nygren’s Case for Undervalued Stocks

Bill Nygren, a respected investment manager at Oakmark Capital, argues that beneath the surface, the S&P 500 still offers value. He notes that while the index as a whole is expensive, the distribution of stock valuations tells a different story.

“Seven years ago, when the S&P traded at lower multiples, there were about 150 companies under 14 times earnings. Today, even with the index much pricier, there are still about 150 companies trading under that level,” Nygren explained in a recent interview.

This suggests that the broad averages may be misleading. Many companies remain reasonably priced if investors are willing to look past the headline numbers and dig deeper into fundamentals.

Financial Stocks Provide a Contrarian Bet

One area Nygren has targeted is financials. After the collapse of Silicon Valley Bank in 2023, many bank stocks traded at steep discounts. Historically, financials have traded at about two-thirds the valuation of the overall market. In the aftermath of the crisis, some were priced at barely half the market’s multiple.

Nygren seized the chance. His Oakmark U.S. Large Cap ETF placed heavy bets on banks such as Citigroup, Bank of America, Charles Schwab, and Capital One. As of June 2025, financials represented nearly 40 percent of his portfolio.

The gamble has paid off so far. Financials have outperformed the broader market since mid-2023, though Nygren still believes there is room for further gains.

Here is a snapshot of how valuations compare:

The data shows financials remain cheap relative to both history and the market overall.

Alphabet Shows Growth and Value

While Nygren tilts heavily toward financials, he has not written off large-cap tech entirely. His single largest holding is Alphabet, parent of Google, which makes up more than 6 percent of his fund.

At first glance, Alphabet’s valuation looks high with a forward P/E above 24. But Nygren argues that when you strip out cash reserves and consider its “Other Bets” division, the core search business trades at a discount compared to peers. He views it as a company that not only generates massive free cash flow but also funds venture-like investments under the same roof.

This highlights Nygren’s broader approach: look for companies where market sentiment undervalues long-term earning power.

What It Means for Everyday Investors

For individual investors, the key lesson is that headline valuations of the S&P 500 may obscure a wide range of opportunities. Even when the index looks stretched, hundreds of companies remain priced at attractive levels.

The challenge is separating genuine value from companies that are cheap for good reason. Investors need to examine balance sheets, cash flow trends, and management behavior. As Nygren emphasizes, companies that grow shareholder value and allocate capital wisely tend to outperform over time.

Bullet points to consider:

• The overall market looks expensive by historical measures.

• Value still exists in underpriced sectors such as financials.

• Concentration in big tech makes the index riskier but also hides opportunities.

The Bottom Line

The S&P 500 may look overpriced, but the story beneath the surface is more complex. While megacap tech firms dominate headlines and inflate index valuations, there are still plenty of overlooked stocks trading at fair prices. Investors who are willing to dig deeper, rather than chasing market leaders, could find opportunities similar to those that existed seven years ago.

What do you think about today’s market? Do you see more risk or more opportunity? Share your thoughts and send this story to friends who are following the market closely.