Looking for Bargains Amid a Historically Expensive Stock Market? Statistically Speaking, This Sector Is Full of Them!

With the exception of the five-week COVID-19 crash in February-March 2020 and the nine-month bear market in 2022, Wall Street's benchmark indexes -- the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) -- have been virtually unstoppable since the start of 2019.

While years of green arrows have put giant smiles on the faces of investors, they've also extended stock valuations into the stratosphere. According to the S&P 500's Shiller Price-to-Earnings (P/E) Ratio (also known as the Cyclically Adjusted P/E Ratio, or CAPE Ratio), the stock market entered 2026 at its second-priciest valuation in history.

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Although finding value on Wall Street is considerably tougher than it's been in the past, one S&P 500 sector stands out as historically cheap amid an expensive stock market.

Want value? This sector is chock-full of bargains.

Let me save you the suspense: it's not the technology sector! Although select areas of tech are certainly becoming intriguing following sizable pullbacks (ahem, software), the S&P 500's tech sector is still sporting a P/E ratio of 21.

It's also none of this year's top-performing sectors, which include energy, utilities, and industrials.

Based on data from Compustat, FactSet, IBES, and Goldman Sachs Global Investment Research, the one S&P 500 sector that's a screaming bargain for investors right now is financials. S&P 500 financial stocks' current P/E of 14 ranks in the 29th percentile in terms of absolute P/E over the last 10 years.

S&P 500 sector valuations... Financials very cheap

Health Care, Real Estate, Materials also not all that frothy

Materials went from a 22x to an 18x multiple in very short order. pic.twitter.com/SgKIqznaP4

-- Mike Zaccardi, CFA, CMT 🍖 (@MikeZaccardi) March 22, 2026

Although financial stocks are often highly cyclical (i.e., tied at the hip to the U.S. economy), there's a big reason to be excited about this sector trading at a historically low P/E multiple: the outlook for interest rates.

The Federal Reserve has been in a rate-easing cycle since September 2024. As recently as five weeks ago, it was expected that rate hikes would continue throughout 2026 and possibly into 2027. Although lower borrowing costs are great news for consumers and businesses, this isn't the case for banks and insurers, which typically thrive when interest rates move higher.

The start of the Iran war on Feb. 28 has changed this dynamic. With the Federal Reserve Bank of Cleveland forecasting an increase in the prevailing inflation rate from 2.4% in February to 3.16% in March, there's the real possibility of rate hikes being enacted before the end of the year. If interest rates start climbing, financial stocks would be the prime beneficiary.

There are 70 financial stocks in the benchmark S&P 500, 30 of which ended the March 24 trading session with a forward P/E ratio of 10 or below! This includes banking stalwart Wells Fargo (NYSE: WFC) and global insurance and financial services provider MetLife (NYSE: MET). Higher interest rates would increase net interest income for Wells Fargo and provide higher interest income on MetLife's float (collected premiums not paid out as claims).

Respective (rounded) forward P/E ratios of 10 and 6.4 for Wells Fargo and MetLife represent discounts of 10% and 23% to their average forward P/E ratios over the last five years. If you want bargains amid a historically expensive stock market, look no further than the financial sector.

Wells Fargo is an advertising partner of Motley Fool Money. Sean Williams has positions in Wells Fargo. The Motley Fool has positions in and recommends FactSet Research Systems and Goldman Sachs Group. The Motley Fool has a disclosure policy.