Where to Invest When Nothing Looks Cheap

Key Takeaways

• The US stock market is getting more expensive, and riskier bonds aren’t offering much more yield than safer ones.
• That means there’s less room for markets to recover from shocks and more limited upside for bond investors.
• Strategists still see opportunities amid elevated valuations, especially when it comes to small caps, international markets, and high-yield bonds.

Bargains are difficult to come by on Wall Street these days. After a bout of tariff-induced volatility, stocks are soaring and bond prices are moving higher. The phenomenon even extends to alternative assets like gold and bitcoin, which are reaching new highs as investors pour money into riskier investments.

While these rallies mean many investors are enjoying solid returns in 2025, loftier valuations also mean bargains are a lot harder to find. At the same time, there is less cushion for stocks in the event of a downturn and more muted potential returns in the bond market.

“Markets are expensive,” says Charles Shriver, a portfolio manager at T. Rowe Price and co-chair of the firm’s Asset Allocation Committee. “We have more modest return expectations looking over the next 12 months.”

Strategists see cheaper opportunities in international markets and small cap stocks, which have lagged the broader market in recent months. In fixed income, they point to high-yield bonds, which they say offer attractive yields and sound fundamentals even though they have less upside over safer Treasury bonds than they historically have.

Stocks Fully Valued

After April’s stock market selloff sent prices plummeting, this summer’s dramatic recovery (especially among mega-cap technology stocks) has pushed valuations higher yet again. As of Aug. 12, the Morningstar US Market Index carried a price/fair value ratio of 1.01, meaning stocks were trading at a slight 1% premium to our assessment of their value. At the bottom of the April selloff, stocks were trading at a discount of as much as 16%. They traded at a premium of as much as 4% in July.

When stocks are expensive and spreads are tight, markets don’t have as much wiggle room to recover from unexpected shocks. “At the current premium, the market is not providing any margin of safety to compensate investors for any of the myriad risks on the horizon,” Morningstar chief US strategist Dave Sekera wrote in his August outlook on the stock market. Those risks include ongoing tariff negotiations, slowing economic growth, and stubborn inflation.

Bond Spreads Narrow

It’s not just stocks that look richly valued. In fixed-income markets, credit spreads are looking tight, meaning there’s a smaller difference between the yields on bonds with similar maturities but different credit qualities. When spreads narrow, investors have more confidence that riskier bonds will avoid a default. That’s a good signal about corporate fundamentals and the health of the economy, but it means more limited upside for corporate bond investors. It also means investors face what analysts call asymmetric returns, meaning risks are tilted more to the downside than the upside.

Over the past five months, the difference in yields between a basket of BBB-rated corporate bonds and Treasury bonds of similar maturities has shrunk from 1.49 percentage points to less than 1 percentage point.

What Kind of Stocks Are a Buy Right Now?

Even within relatively expensive markets, analysts say there are still pockets of opportunity. Small-cap stocks still look undervalued, as do pockets of international markets and certain sectors that are more insulated from the impact of tariffs.

In fixed-income markets, analysts say high-yield bonds are still attractive, thanks to strong corporate fundamentals and yields that remain high relative to history. Fund managers also emphasize the importance of finding opportunities in individual names that may be better positioned than their peers.

Here’s a closer look at where some top strategists say investors can find attractive opportunities.

Value Stocks

With tech and growth stocks among the most overvalued in US markets, Morningstar’s Sekera advocates for an overweight position in value stocks, which are trading at a roughly 7% discount to our estimate of the category’s fair value. He recommends underweighting the growth category, which is trading at a 16% premium.

After outperforming both growth stocks and the broader market at the beginning of the year, value stocks have fallen behind since the market began its upward climb at the end of April. The Morningstar US Growth Index has returned 24.5% since April 9, while the US Market Index is up 18.9%. The Morningstar US Value Index has gained 9.5% over that period.

International Stocks

Shriver of T. Rowe Price points to international stocks as an opportunity for investors “where valuations are more compelling.” He says the picture looks rosy for European stocks in particular, thanks to accommodative monetary policy and the fiscal stimulus spending he expects to flow through the European economy over the next year. Within international allocations, he sees opportunities in value stocks like financials as well as international small caps.

Ken Ryan, who manages a new international equity fund at Parnassus Investments, says he’s finding opportunities from the bottom up. “It’s not really [a strategy] where you want to buy the whole benchmark,” he says. “You really want to go the direction where someone’s looking deeply into these companies and finding the value, finding those opportunities where a non-US competitor of a US company may trade at a significant discount.”

Ryan points to Unilever UL, a British consumer staples company that’s comparable to Procter & Gamble PG in the United States, and Taiwan Semiconductor Manufacturing TSM, which is expected to benefit from the same tailwinds that are driving Nvidia NVDA higher. Both are trading at cheaper multiples compared with their US competitors.

Small Caps

Back within US borders, Sekera continues to see potential in small-cap stocks. “On both an absolute value and relative value basis, small-cap stocks remain very attractive,” he writes. The category is trading at a 16% discount to Morningstar’s estimate of its fair value. Sekera notes that small caps may “take a while before they work,” since they tend to outperform during a recovery from an economic downturn.

The Morningstar US Small Cap Index has returned roughly 5% so far this year, half the 10% return of the broader market over the same period. Small caps have lagged the broader market every year since 2022.

High-Yield Bonds

Cheaper opportunities are more difficult to come by in the bond market. But managers say that despite narrow spreads, yields are still compelling and fundamentals remain strong. Shriver of T. Rowe Price says his team is maintaining an overweight position to high-yield bonds, which are riskier than Treasuries and investment-grade corporate bonds. “We think the credit metrics are reasonable,” he says. He emphasizes the importance of shrewd management in that space, even though he’s not worried about a major downturn in the sector. “It helps to ensure you’re getting fairly compensated for the risk you’re taking within the portfolio.”

Mitchell Garfin, co-head of leveraged finance within BlackRock’s fixed income group and a manager of the firm’s high yield strategies, adds: “The real value proposition for high yield is the all-in yield as opposed to spreads. Yes, growth has slowed, but the fundamentals really haven’t changed too much … the backdrop here for investing in risk, investing in high yield, it is still quite positive.”

Garfin points to several sectors that present opportunities within the high-yield space, including tech and software and aerospace and defense, which will likely be more insulated from tariff-related shocks, along with insurance. Within those sectors, he says investors can find issuers offering compelling relative value. And even with spreads on the narrow side, “we are still constructive on the market.”