Are Defensive Stocks Like Walmart, Costco, and Procter & Gamble Becoming Overvalued and Overexposed in 2026?

The global economy in 2026 remains a study in contradictions. While macroeconomic uncertainty persists-marked by inflationary pressures, geopolitical tensions, and uneven growth cycles-defensive stocks have attracted a surge of investor capital. Among the most prominent are Walmart (WMT), Costco (COST), and Procter & Gamble (PG), whose stable cash flows and brand strength have long made them staples of conservative portfolios. Yet, as institutional ownership and fund inflows accelerate, a critical question emerges: Are these stocks now overvalued and overexposed, and should investors pivot to undervalued alternatives like Turning Point Brands (TPB), Johnson & Johnson (JNJ), or NextEra Energy (NEE)?

Valuation Risks: A Closer Look

Walmart and Costco, two retail titans, present divergent valuation profiles. As of 2026, Walmart trades at a forward P/E multiple of 36.02, slightly above its historical median of 35.58. This modest premium reflects investor confidence in its omnichannel strategy, digital advertising initiatives (e.g., Walmart Connect), and the resilience of its core retail operations according to financial analysis. Costco, by contrast, carries a forward P/E of 45.01, which, while below its one-year median of 50.39, is still above its historical median of 49.44 as reported by market data. This suggests a valuation that is neither excessively stretched nor undervalued.

Price-to-book (P/B) ratios further highlight their strategic differences. Walmart's P/B of 9.32 aligns with its asset-heavy model, while Costco's 12.68 reflects a premium for its membership-based, high-loyalty business as noted in financial comparisons. However, these multiples must be contextualized. Walmart's earnings quality has improved due to higher-margin activities (e.g., Walmart+ subscriptions), supporting its multiple expansion according to financial reports. Costco's reliance on thin merchandise margins and membership fees, meanwhile, may limit its ability to sustain rapid earnings growth as financial data indicates.

Procter & Gamble (PG), a bellwether of the consumer staples sector, faces near-term headwinds. A slowdown in household and personal care demand has pressured its valuation, though its robust dividend yield and supply chain investments remain attractive as per market analysis.

Sector Crowding: A Double-Edged Sword

Defensive stocks are increasingly crowded. Institutional ownership in healthcare, utilities, and consumer staples has risen sharply in 2026, driven by macroeconomic caution. For example, Johnson & Johnson (JNJ), a healthcare giant, has seen its institutional ownership grow as investors bet on its non-discretionary demand and R&D pipeline according to market reports. Similarly, NextEra Energy (NEE), a utility leader, benefits from structural growth in renewable energy and AI-driven infrastructure demand as noted in financial analysis.

Yet, crowding carries risks. As more capital flows into defensive sectors, valuations may become unattractive. Walmart and Costco, for instance, now face elevated institutional ownership percentages, with fund inflows outpacing those of cyclical peers as financial data shows. This trend mirrors the 2020-2021 surge in tech stocks, where overexposure eventually led to volatility.

Undervalued Alternatives: A Prudent Counterbalance?

While Walmart and Costco remain solid choices, undervalued alternatives like TPB, JNJ, and NEE warrant closer scrutiny. Johnson & Johnson, for example, trades at a current P/B of 6.19, above its 3-year average, but its forward EPS growth of 5.7% for 2026 supports its valuation according to valuation analysis. NextEra Energy, though lacking specific 2026 multiples, benefits from a regulated utility model and renewable energy leadership, offering both defensive and growth characteristics as financial reports indicate.

Turning Point Brands (TPB), a consumer staples play, has seen a 40% share price rise in 2025, driven by its focus on non-discretionary categories according to market data. Its Zacks Rank #1 (Strong Buy) rating underscores its appeal as a value play, though its smaller market cap introduces liquidity risks.

Scenarios for 2026: Bull, Bear, and Sideways

Bull Case: If macroeconomic stability prevails, defensive stocks like Walmart and Costco could outperform. Their pricing power and market dominance would shield them from sector-specific shocks. JNJ and NEE, with their structural growth drivers, could also deliver strong returns.

Bear Case: A sharp recession or inflationary spike could trigger a rotation out of overvalued defensives. Walmart and Costco, with their elevated P/E multiples, might underperform as investors seek higher-yielding or cyclical plays.

Sideways Case: In a low-growth, low-volatility environment, defensive stocks would likely trade in a narrow range. Here, undervalued alternatives like TPB and JNJ could offer better risk-adjusted returns.

Conclusion: Balancing Caution and Opportunity

Defensive stocks are not inherently overvalued, but their current popularity demands scrutiny. Walmart and Costco remain resilient, yet their valuations reflect a premium that may not be fully justified by earnings growth. For investors seeking to mitigate crowding risks, a diversified approach-combining exposure to established defensives with undervalued alternatives like JNJ and NEE-offers a pragmatic path.

As always, the key lies in aligning portfolio allocations with macroeconomic expectations and risk tolerance. In 2026, as in any year, defensive positioning must be tempered by vigilance against complacency.