Historic Valuation Gaps Are Pointing to a Major Market Shift

Key Takeaways

U.S. equity valuations are elevated: The S&P 500 ended 2025 at ~22x earnings versus a 30-year average of ~17x, with cyclically adjusted valuations near levels seen only in 1999–2000 and 2021—historically associated with muted forward returns.
Forward return expectations are constrained: At current valuation levels, historical data suggests 5-year forward S&P 500 returns are likely to be modest and potentially below long-term inflation.
Market concentration is at record highs: The top 10 stocks now represent ~41% of the S&P 500, far exceeding prior peaks, despite contributing a smaller share of overall earnings growth—an unusual and historically unstable dynamic.
Broad market participation has been narrow: Over the past three years, the average S&P 500 stock has lagged the index by more than 25%, a rare setup that has previously preceded periods of market broadening.
Small-cap valuations are deeply discounted: Relative valuation spreads between small caps and large caps are near historical extremes across multiple metrics, comparable to prior cycle troughs such as 2000.
Relative performance is at an inflection point: Small caps sit in the lowest decile of rolling 10-year relative returns versus large caps, a condition that has historically preceded extended periods of outperformance.
Small caps are historically under-owned: As a share of total equity ownership, small caps are near levels last seen in the 1930s, creating the potential for asymmetric upside from even modest reallocations.
Multiple catalysts support a rotation: Rate cuts, improving liquidity, earnings re-acceleration, deregulation, and expected fiscal stimulus provide a supportive backdrop for small-cap profitability and valuation normalization.
Early signs of leadership rotation are emerging: Recent market action shows value and small caps beginning to outperform growth and large caps, consistent with the early stages of a new cycle.
Example opportunity—Gray Media (GTN): A leading local TV station owner with dominant market positions, positioned to benefit from a heavy political advertising cycle, industry deregulation, accelerated debt reduction, and valuation levels near historical troughs across both equity and credit.

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Comments dated 1/21/26.

The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.

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