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Top 3 Sectors Where Valuations Are Most Below Market Levels

Dollar, stock exchange and ETF Exchange Traded Funds — Photo

Key Points

  • Sector investing is one key method to take advantage of undervaluation in the stock market.
  • Comparing forward price-to-earnings (P/E) ratios across sectors can indicate where opportunities may lie.
  • These three sectors (with one important caveat) are trading at the lowest forward P/E ratios compared to the S&P 500. Three ETFs provide low-cost ways to invest in them.
  • Five stocks to consider instead of Energy Select Sector SPDR Fund.

Whether focusing on growth stocks, value stocks, or a mix, the goal is the same: find and invest in undervalued assets. This thread remains true when considering how to invest across the 11 different stock market sectors. At certain times, specific sectors can see their value relative to the overall market trade at a discount. 

A way to identify this is by looking at sector-specific forward price-to-earnings (P/E) ratios. As of May 2, according to Yardeni Research, the S&P 500 Index was trading at a forward P/E of just over 20. The analysis below will look at the three sectors trading the furthest below this figure, indicating that these sectors are potentially undervalued.

XLU: Utilities Have Tariff Resistance and Forward P/E Is Down

Utilities Select Sector SPDR Fund Today

Utilities Select Sector SPDR Fund stock logo
XLUXLU 90-day performance
Utilities Select Sector SPDR Fund
$80.52 +0.97 (+1.22%)
As of 05/6/2025 04:10 PM Eastern
52-Week Range
$67.60
$83.41
Dividend Yield
2.83%
Assets Under Management
$18.24 billion

The first is the S&P 500 utilities sector. The Utilities Select Sector SPDR Fund NYSEARCA: XLU tracks it closely. It is trading at a forward P/E of under 18x, which is around 13% below the S&P 500. This comes even as the sector is the best performing so far in 2025, with a total return of approximately 6% as of May 2. Utilities have a key advantage in today’s economy: their concentration in the United States.

The latest FactSet Earnings Insight full report shows that S&P 500 utilities companies earn 98% of their revenues from the United States. This is the highest percentage among all sectors. This means that these companies have to worry much less about the effect of tariffs. Utilities have also impressed in Q1 earnings so far. They posted the largest difference between estimated and actual revenues at almost 4%. Additionally, XLU boasts one of the highest dividend yields among the SPDR sector funds at nearly 2.8%. This can provide a valuable source of stable returns in uncertain times.

XLV: Healthcare Is a Q1 Earnings Standout

Health Care Select Sector SPDR Fund Today

Health Care Select Sector SPDR Fund stock logo
XLVXLV 90-day performance
Health Care Select Sector SPDR Fund
$134.33 -3.81 (-2.76%)
As of 05/6/2025 04:10 PM Eastern
52-Week Range
$129.66
$159.64
Dividend Yield
1.74%
Assets Under Management
$36.19 billion

Second is the S&P 500 healthcare sector, which is trading at a forward P/E of just under 17x. Technically, the financial services sector is trading at a bigger discount than healthcare, with a forward P/E of just over 16. However, context is vital. The financial services sector usually trades at a forward P/E significantly below the market. Thus, it is difficult to say that the difference today indicates a significant degree of undervaluation. Rather, it seems likely that it is simply a part of the general relationship between financials and the overall market. So, it makes more sense to point to healthcare as being potentially undervalued.

Healthcare has seen extended periods in the past where its forward P/E trades significantly above or in line with that of the overall index. So, it is notable to point out that the sector’s forward P/E ratio is trading almost 17% below that of the S&P 500. Adding to the intrigue is that 90% of healthcare companies in the S&P 500 reported Q1 earnings that were above consensus estimates. This is the highest figure of any sector in Q1. It has also seen 50% of companies issue positive guidance, and 50% issue negative guidance. This stands out positively against most sectors, which have generally seen more companies report negative guidance. The highly liquid Health Care Select Sector SPDR Fund NYSEARCA: XLV makes investing in this sector easy.

XLE: Low Forward P/E and Increasing Demand Could Be a Recipe for Success

Energy Select Sector SPDR Fund Today

Energy Select Sector SPDR Fund stock logo
XLEXLE 90-day performance
Energy Select Sector SPDR Fund
$80.52 +0.02 (+0.02%)
As of 05/6/2025 04:10 PM Eastern
52-Week Range
$74.49
$97.92
Dividend Yield
3.55%
Assets Under Management
$26.09 billion

Last up is the S&P 500 energy sector, which is trading at a forward P/E of 14. This is a substantial discount to the overall market at around 31%. Warren Buffett and his future successor, Greg Abel, discussed the energy and utilities sectors at the Berkshire Hathaway NYSE: BRK.A shareholders' meeting. Abel noted that the capital required to meet the long-term projection of energy demand is "enormous." This is particularly true when thinking about data centers. The International Energy Agency (IEA) says that over the next five years, energy demand from data centers will double.

Analysts expect emerging market economies to drive rising energy demand for decades. S&P 500 energy companies can benefit from this, as over a third of their revenues come from outside the United States. According to FactSet, in line with the sector’s low forward P/E ratio, Wall Street price targets indicate a significant upside of 24% in the energy sector. This is the highest percentage of any sector. The Energy Select Sector SPDR Fund NYSEARCA: XLE is one of the most-used ETFs for tracking the sector's performance.

Should You Invest $1,000 in Energy Select Sector SPDR Fund Right Now?

Before you consider Energy Select Sector SPDR Fund, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Energy Select Sector SPDR Fund wasn't on the list.

While Energy Select Sector SPDR Fund currently has a Hold rating among analysts, top-rated analysts believe these five stocks are better buys.

View The Five Stocks Here

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Leo Miller
About The Author

Leo Miller

Contributing Author

Fundamental Analysis, Economics, Industry and Sector Analysis

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Energy Select Sector SPDR Fund (XLE)N/A$80.52+0.0%3.55%14.24Moderate Buy$80.52
Utilities Select Sector SPDR Fund (XLU)N/A$80.52+1.2%2.83%20.26Moderate Buy$80.52
Health Care Select Sector SPDR Fund (XLV)N/A$134.33-2.8%1.74%27.65Moderate Buy$134.33
Compare These Stocks  Add These Stocks to My Watchlist 

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