As 2025 draws to a close, the broader U.S. equity market is presenting what some analysts view as a modest opportunity for value investors. According to a recent assessment by Morningstar, U.S. equities are currently trading at approximately a 3% discount to their composite “fair-value” estimate, indicating that, while not deeply undervalued, the market is offering a potential buying opportunity.
Throughout November, both value and small-cap stocks outperformed their growth counterparts. The Morningstar U.S. Value Index saw a 3.06% increase, while the U.S. Core Index gained 2.32%. In contrast, the U.S. Growth Index experienced a decline of 2.37%. Among the various market segments, small-cap stocks continue to stand out, trading at roughly a 15% discount to fair value. This contrasts with the 3% and 2% discounts seen in large-cap and mid-cap stocks, respectively, making small-caps the most undervalued segment of the market.
Looking ahead, the conclusion of the earnings season, combined with companies having already reset their guidance for the near term, sets the stage for a traditional year-end “Santa Claus rally.” This rally, which typically occurs in the final days of the year, could gain traction if macroeconomic indicators remain steady and investor sentiment improves. However, analysts warn that the potential rally may be more muted than in previous years due to ongoing macroeconomic uncertainty and the prospect of potential policy shifts in 2026.
Despite these concerns, the relative undervaluation of small-cap stocks presents a promising scenario for investors who are focused on long-term value. With earnings expectations largely set for the next few quarters and macroeconomic signals stabilizing, small-cap stocks may continue to outperform their larger counterparts as investors seek to capitalize on the discounts available in this segment.
However, it’s important to note that broader market dynamics, such as potential changes in monetary policy or shifts in inflation expectations, could still create volatility, tempering the overall market’s performance. As we head into 2026, investors will need to stay alert to evolving economic conditions and their potential impact on valuations. While there may be opportunities for gains, caution is advised in navigating what could be a more complex and unpredictable environment in the year ahead.