These undervalued stocks blew away the S&P 500 in 2025 - a 2026 repeat is likely

By Mark Hulbert

Valuation indicators now are extremely bearish for U.S. stocks. Non-U.S. stocks are a much better bet.

Non-U.S. stocks are a far better value for investors now.

It's hard to imagine valuation indicators telling a more bearish story for U.S. stocks than they do now.

Non-U.S. stocks about doubled the return of the S&P 500 in 2025 - and it's a good bet they'll continue their impressive run in 2026.

That's a welcome prediction for those of you who want to remain heavily invested in equities but are wary about U.S. stocks because of their extreme overvaluation. Non-U.S. stocks on average represent far better value.

Many U.S. investors aren't aware of non-U.S. stocks' impressive 2025 performance because the financial headlines in the U.S. have been dominated by news about the "Magnificent Seven" stocks and the AI trade. Yet in contrast to the 16.3% total return of the S&P 500 SPX (year to date through Dec. 26), non-U.S. stocks returned more than twice that - a 33.1% return (according to the MSCI All-Country World ex-U.S. index).

Some of this outperformance was caused by the declining U.S. dollar DXY, which boosts the dollar-denominated return of non-U.S. stocks. But even still, non-U.S. equities on average are significantly cheaper than U.S. stocks. So even if the dollar doesn't depreciate in 2026, non-U.S. equities are still a better bet to outperform the U.S. equity market.

This is best seen by comparing different stock markets' cyclically adjusted CAPE ratios. These ratios are calculated by dividing a stock market's level by component companies' trailing 10 years' inflation-adjusted earnings. (This ratio is what was made famous in the 1990s by Yale University finance professor Rober Shiller's warnings about equity investors' irrational exuberance.)

According to data compiled by Barclays Indices, the U.S. CAPE ratio is higher than the comparable ratio of two dozen other countries monitored. The average of those other countries' CAPE ratios is only slightly more than half that of the U.S.

Overvaluation warnings

The CAPE ratio is one of 10 valuation indicators that I update monthly. Each was picked because of its statistically significant ability to forecast the S&P 500 inflation-adjusted total return over the subsequent decade. All 10 indicators tell a similar story of extreme overvaluation in the U.S. stock market.

The table above lists the latest values of each of these 10 indicators. A 100% reading in the three right-most columns of the table means the stock market is more overvalued currently than at prior times in U.S. history. The average of the percentages listed in those columns is 98%. It's hard to imagine these indicators telling a more bearish story than they do now.

Which is the safer bet: That U.S. equities in 2026 will once again defy gravity by rising in the face of extreme overvaluation, or that the far cheaper non-U.S. stocks will be the better performers?

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: This winning fund manager spills 4 secrets about smart ways to buy non-U.S. stocks

Also read: Warren Buffett gifts us 5 secrets for investing success, as he hands off Berkshire's reins this week

-Mark Hulbert

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