Key Takeaways

• As unprofitable companies drive a frothy market in late 2025, WisdomTree’s earnings-weighted Indexes offer a disciplined alternative by systematically excluding non-earners and reducing valuation risk.
• Following the December rebalance, the WisdomTree U.S. LargeCap Fund (EPS) traded at a 13.5% P/E discount to the S&P 500, while EES maintained a dramatic valuation gap of over 10 turns below the S&P 600 Value Index.
• Sector tilts across WisdomTree’s earnings-weighted strategies reflect a quality bias, with consistent over-weights to profitable growth sectors like Communication Services and Health Care, positioning them for resilience heading into 2026.
   

Are We in an AI Bubble?

The truth is, only hindsight will give us a definitive answer. What we do know, however, is that valuations today sit well above historical norms, with the S&P 500 looking increasingly stretched. Aside from the sharp COVID-19 rebound between 2020 and 2021, we haven’t seen multiples anywhere near these levels since the dot-com era.
 

Historical S&P 500 Index Forward P/E
 

Sources: WisdomTree, FactSet, S&P. Forward. Historical Forward P/E measured since 12/31/1994. You cannot invest directly in an index.
 

Valuations aren’t the only factor fueling the “bubble” conversation. We’re also seeing pockets of frothiness, reflected in the outperformance of traditionally lower-quality stocks.

For example, unprofitable companies are outperforming profitable companies by over 14% this year, a trend that is unlikely to hold up in the long run.
 

Sources: WisdomTree, FactSet. Returns measured since 12/31/24. Past performance is not indicative of future returns. 
 

The WisdomTree Earnings Family

In 2007 WisdomTree launched a family of earnings-weighted Indexes across the large-, mid- and small-cap categories. These Indexes systematically remove unprofitable companies and give greater weight to companies with higher earnings, which generally results in a lower price-to-earnings (P/E) ratio relative to traditional market cap weighting. 

Take the large-cap Index, as an example. As of November 2025, the WisdomTree U.S. LargeCap Dividend Index traded at a forward P/E of 20.1 times, a 13.5% discount to the 23-times P/E on the S&P 500. 

Forward P/E Ratio
 

Sources: WisdomTree, FactSet, S&P. Data 2/28/07–11/28/25. You cannot invest directly in an index. 
 

Given the distinct value tilt of the strategies, the Funds are often compared to value benchmarks and included in Morningstar’s value style boxes.

For the one-year period ending November 30, 2025, the WisdomTree U.S. LargeCap Fund (EPS)—which tracks the WisdomTree U.S. LargeCap Index net of fees and expenses—outperformed the S&P 500 Value Index by 826 basis points.

The mid-cap (EZM) and small-cap (EES) versions had performances that were more in line with respective value benchmarks. 

1-Year NAV Total Return as of 11/30/25
 

Sources: WisdomTree, FactSet, S&P. Returns measured since 12/31/24. Past performance is not indicative of future returns. You cannot invest directly in an index.
 

Rebalance Overview 

Each December, the Indexes are rebalanced back to earnings. This year the rebalance went into effect at the close of December 10. 

Across each Index, the rebalances serve to maintain attractive fundamentals at discounted valuations compared to broad-market benchmarks. The WisdomTree Core Equity Index Committee oversees the Indexes’ rebalances, ensuring index rules are implemented correctly and comprehensively, and that earnings data used as inputs accurately reflect component company profitability. 

Following their rebalances, the Indexes tracked by EPS, EZM and EES decreased their P/E ratios, with the MidCap and SmallCap Indexes maintaining significant discounts to the S&P 400 Value and the S&P 600 Value indexes, respectively.

The Committee has discretion to use non-GAAP earnings metrics, like earnings that adjust for investments in intangible assets, which is why you see some exposure to negative earners in the post-rebalance portfolio. 

The biggest difference in our earnings-weighted approach is visible in small caps. The post-rebalance Index for EES has a 14.5 times P/E ratio, over 10 turns below the S&P 600 Value, which has almost double the exposure to companies with negative earnings. 
 

Fundamentals
 

Sources: WisdomTree, FactSet, S&P. Benchmark index data as of 11/28/25. 
 

Since its inception, EES has consistently held significantly fewer negative earners than the broad MSCI USA Small Cap Index.

The sawtooth pattern for EES represents the impact of rebalancing back to companies with positive earnings each December. 

Percent Negative Earners, EES vs. MSCI USA Small Cap Index
 

Sources: WisdomTree, FactSet, MSCI. Data 3/30/07–11/28/25. You cannot invest directly in an index.
 

Rebalance Sector Changes

The sector differences between the WisdomTree U.S. LargeCap Index and the S&P 500 Value Index reflect a quality tilt, with over-weight allocations to the Communication Services, Consumer Discretionary and Information Technology sectors. The Index is slightly under-weight in traditional value sectors like Consumer Staples, Energy and Utilities. 

Sector Changes, WisdomTree U.S. LargeCap Index
 

Sources: WisdomTree, FactSet, S&P. Data as of 11/28/25. 
 

The WisdomTree U.S. MidCap Index maintained over-weights to Consumer Discretionary, Energy and Health Care relative to the S&P 400 Value Index, with under-weights to Materials, Real Estate and Utilities.

Sector Changes, WisdomTree U.S. MidCap Index,
 

Sources: WisdomTree, FactSet, S&P. Data as of 11/28/25. 
 

The WisdomTree U.S. SmallCap Index maintained over-weights to Energy, Financials and Health Care, and under-weights to Industrials, Information Technology, Materials and Real Estate.

Sector Changes, WisdomTree U.S. SmallCap Index
 

Sources: WisdomTree, FactSet, S&P. Data as of 11/28/25. 
 

Looking Ahead to 2026

With valuations stretched and market leadership increasingly narrow, earnings weighting offers a disciplined way to stay invested while managing valuation risk. The 2025 rebalance restored meaningful discounts across the WisdomTree earnings-weighted Indexes, reduced exposure to unprofitable companies and reinforced the core principle behind the approach: focus on companies generating real earnings.

As we look to 2026, earnings weighting remains a powerful tool for navigating uncertain markets—helping investors maintain fundamentals-driven equity exposure at more attractive valuations.

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