Beyond the Giants: The Case for Small- and Mid-Cap Investing
Market Recap for the Week of September 28, 2025
U.S. stocks slipped only slightly last week, with the S&P 500 finishing down less than 0.25% for the week. Year-to-date, Communication Services and Technology remain the top-performing sectors, each up a bit over 20%. Healthcare is the only sector showing a loss for the year, down just under 1%.
Large-cap growth stocks continue to lead the market. Small-cap stocks, which were negative earlier in the year, recently turned positive but still trail large-caps by roughly 10% for 2025. Even with that lag, we think small-caps deserve a place in a diversified portfolio.
Based on price-to-earnings data from Ed Yardeni, small- and mid-cap stocks are trading near their long-term average valuations. Large-caps, by contrast, are priced close to their historical highs. That doesn’t mean big companies can’t keep climbing, but from a valuation standpoint, small-caps look relatively inexpensive.
“Large-caps may be priced near their historical highs, but small-caps look far more attractive from a valuation standpoint.”
Chart of The Week
This week’s chart from Ed Yardeni highlights the current P/E ratios for small-cap, mid-cap, large-cap, and the “Magnificent 7.” The gap in valuations between these groups is striking. It hasn’t always been this wide, back in the mid-2000s, small and large-cap stocks were priced much more similarly. The key question now: will valuations eventually converge (a “mean reversion”), or will the spread between small and large caps stay wide?
The commentary in this blog is for informational purposes only and should not be taken as personalized investment advice
Source: Source: LSEG Datastream and ® Yardeni Research, and Standard & Poor's.* Magnificent-7 stocks include Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, NVIDIA, and Tesla. Both classes of Alphabet are included.
