MW Investors are turning to this neglected part of the stock market. And it's still cheap.
By Philip van Doorn
Also: A retailer's stock that has beaten Nvidia's long-term return, stories from first-time home buyers, and advice from the Moneyist.
Over the past month there have been many warnings that the stock market - particularly the S&P 500 - may have reached a stretched valuation relative to the component companies' earnings. But the story is different for small-cap stocks, which have sprung to life over the past month.
From the end of July through Thursday, the S&P 500 SPX returned 2.7%, while the Russell 2000 Index RUT of small-cap stocks returned 7.7% and the S&P Small Cap 600 Index SML returned 7.5%. All investment returns in this article include reinvested dividends.
Now let's look at forward price-to-earnings ratios for the S&P 500 and the S&P Small Cap 600 and compare them with long-term average valuations. These are prices divided by rolling consensus 12-month earnings-per-share estimates among analysts polled by FactSet, weighted by market cap. You may need to scroll the table to see all of the data.
Index Forward P/E to 10-year average Forward P/E to 20-year average Forward P/E 10-year average forward P/E 20-year average forward P/E
S&P 500 119% 138% 22.45 18.87 16.33
S&P Small Cap 600 102% 108% 15.70 15.33 14.50
Source: FactSet
We have left the Russell 2000 out of this comparison because this index includes hundreds of unprofitable companies, making a forward P/E ratio meaningless. For initial inclusion in the S&P Small Cap 600, companies need to meet S&P Global's criteria, which include four consecutive profitable quarters.
The S&P 500 is trading at a forward P/E valuation of 22.45, which is 19% higher than its 10-year average P/E and 38% higher than its 20-year average valuation. The S&P Small Cap 600 trades at a forward P/E of 15.7, which is only slightly above its 10-year average P/E and 8% higher than its 20-year average.
Mark Hulbert dug into the small-cap rally and took a look at historical statistics to consider how strong a trend this might turn out to be.
Michael Brush made the case for a sustained small-cap rally and shared five small-cap stock picks from the money managers he interviewed.
This retailer's stock has outperformed Nvidia's
Shares of Dillard's Inc. have returned 2,134% over the past five years through Aug. 28, with dividends reinvested, while Nvidia Corp.'s stock has returned 1,275%.
There is no question that Nvidia Corp. (NVDA) has had an amazing growth run, but could you have guessed that its stock has been outperformed by that of a department-store operator? Bill Peters explained how Dillard's Inc. $(DDS)$ has remained a strong competitor in a brutal industry - and looked at one way its management team avoids some distractions faced by most publicly traded companies.
Full coverage of Nvidia's results and a look ahead
After the market close on Wednesday, Nvidia reported results for its fiscal quarter that ended July 27. The stock declined slightly on Thursday. That could be considered a sigh of relief by investors, since the stock was up 35% through Wednesday, following a 171% return last year.
Nvidia's quarterly revenue came in at $46.74 billion, which was an increase of 6% from the previous quarter and 56% from the year-earlier quarter. To add more perspective, sales for the July quarter were nearly 3.5 times as high as they were two years earlier.
While Nvidia's pace of revenue growth has been slowing, the consensus estimate among analysts polled by FactSet is for the pace to pick up next quarter, with a 16% sequential increase to $54.32 billion in sales.
Emily Bary led the MarketWatch companies team's detailed live coverage of all aspects of Nvidia's results, along with analysts' reaction and comments on what may lie ahead.
More technology sector news:
-- A $400 billion bonanza? As AI spending estimates move higher, so do the stakes for investors.
-- This under-the-radar storage stock is cashing in on Meta's AI spending
-- Alibaba's cloud-computing business is thriving and it has a new AI chip in the works. The stock is rising.
How about a 70/30 strategy favoring bonds in your portfolio?
Every morning, the Need to Know column includes a summary of early market news, along with ideas from professional traders and money managers. You can sign up to have it arrive in your inbox every business day.
You are probably familiar with the old 60/40 portfolio, recommended for investors who want most of their money in stocks but who also want an income buffer to cut overall risk with a 40% allocation to bonds.
This week Barbara Kollmeyer interviewed Todd Schlanger, a senior investment strategist with Vanguard, who made the case that some investors, based on current market conditions and their investing goals, should embrace portfolio allocations that are 70% bonds and 30% stocks.
Advice from the Moneyist
Quentin Fottrell is the Moneyist.
Here's an interesting question a MarketWatch reader asked Quentin Fottrell - the Moneyist - this week: Can the victim of an online scam deduct the loss from their taxable income?
More from the Moneyist:
-- 'I have almost no retirement savings': I'm 57 and have $8K in my 401(k) and $17K in my IRA. Have I left it too late?
-- 'Everyone was grieving': Did my wife's brothers cheat her out of her inheritance? There's a condo and $550K at stake.
-- 'They knocked her down and started biting': My mother, 84, was viciously attacked by her neighbor's two dogs. Do we sue?
This is how first-time home buyers are getting deals done in this market
Aarthi Swaminathan covered three couples' paths to buying their first homes.
More coverage of the residential real-estate market:
-- Home prices grow at slowest pace in two years, reflecting 'extraordinarily weak' demand
-- This may slow the decline of mortgage rates - even if the Fed soon cuts interest rates
-- It took this couple a year to buy a home. Here's what they say about today's 'buyer's market.'
Banks' profits might get even bigger, and it might not be too late to scoop up regional players' stocks
KeyCorp, based in Cleveland, is among the regional banks currently favored for investment by Christopher McGratty, head of U.S. bank research at KBW.
Just as small-cap stocks have lagged behind large-cap stocks this year, the KBW Regional Banking Index XX:KRX has returned 4.8%, trailing the 18.3% return for the KBW Nasdaq Bank Index BKX, which includes the largest U.S. banks.
An easy way to invest in the KBW Regional Banking Index is to hold shares of the Invesco KBW Regional Banking exchange-traded fund KBWR, which has 50 stocks in its portfolio. You can track the largest banks with the Invesco KBW Bank ETF KBWB.
If the Federal Open Market Committee begins a new cycle of cutting the federal-funds rate, banks' cost for deposits will decline, while long-term interest rates might not even budge. So the rate cuts could be a catalyst, especially for regional banks that are more reliant than the largest banks on profiting on the spread between loan interest rates and the cost of deposits.
Steve Gelsi interviewed Christopher McGratty, head of U.S. bank research at KBW, who said: "You still want to be overweight universal banks."
But McGratty also named six regional banks favored by his team of analysts.
Related: Trump's push for lower interest rates is on a collision course with government bonds
How Social Security disability survivor benefits work
In the Help Me Retire column, Alessandra Malito answered a complex question from a reader about Social Security. If a person receiving Social Security disability payments dies, will their spouse be eligible for survivor benefits?
Retirement planning: I'm 32 and only have $8,000 saved in my 401(k). How do I get more aggressive?
Is it time to consider moving on from the iPhone?
Some iPhone users might appreciate Apple's deliberate approach to adding AI features, while others might bail for newer technology.
Apple Inc. $(AAPL)$ seems to be a taking a slow approach to adding artificial-intelligence features to the iPhone. Opinions and use cases vary - plenty of iPhone users are content to have fewer AI features at hand.
But some want the latest technology and might be considering switching to an Android phone for AI features that the iPhone cannot match - at least not yet.
Genna Contino dug into the advantages and disadvantages for iPhone users considering making a switch to the new Google Pixel 10.
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-Philip van Doorn
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August 29, 2025 11:27 ET (15:27 GMT)
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