John Bajkowski
is the president of AAII.
The stock market ended September on a strong note, lifted by several key forces. The Federal Reserve reignited its interest-rate-cutting cycle after a nine-month pause with a 25-basis-point reduction, responding to evidence of a slowing labor market. Revisions to U.S. Bureau of Labor Statistics jobs data and rising unemployment claims confirmed the cooling trend, fueling expectations for additional easing. Despite these headwinds, economic data remained supportive—second-quarter 2025 gross domestic product (GDP) was revised higher on robust consumer spending, and the Atlanta Federal Reserve’s strong third-quarter 2025 forecast reinforced confidence in continued growth.
Investor enthusiasm for artificial intelligence (AI) continued to power gains, particularly among large-cap technology leaders such as Nvidia Corp. 
(NVDA) and Oracle Corp. (ORCL). Meanwhile, small-cap stocks joined the rally, with the Russell 2000 index reaching its first new high last month since 2021. The market also demonstrated resilience in September in the face of a potential government shutdown, a scenario that has historically coincided with modest S&P 500 index gains.
Vanguard 500 Index fund (VFINX) advanced 3.6% in September, while the AAII Model Shadow Stock Portfolio rose 6.8%. Among small-cap benchmarks, Vanguard Small Cap Index fund (NAESX) gained 1.0%, and Dimensional Fund Advisors’ DFA U.S. Micro Cap I fund (DFSCX) added 0.7%.
Year to date, small-cap stocks continue to lag larger companies. The S&P SmallCap 600 index is up 4.2%, compared to a 5.8% gain for the S&P MidCap 400 index and a 14.8% gain for the S&P 500. The Model Shadow Stock Portfolio is up 13.9% year to date.
While small-cap value outperformed small-cap growth in September, large-cap growth stocks resumed market leadership for the month.
Since its inception in 1993, the AAII Model Shadow Stock Portfolio has achieved a compound annual return of 13.3%, compared to 10.7% for Vanguard 500 Index and 9.9% for Vanguard Small Cap Index over the same period.
Even as the overall market advanced during the month, market breadth weakened, particularly among mid- and small-cap stocks.
Within the S&P 500, there were 248 advancing issues, versus 255 declining issues—a 0.97 ratio, down sharply from 2.03 last month. Eight of the 11 S&P sectors posted gains in September, compared to 10 in August. The information technology (+7.2%) and communication services (+5.6%) sectors led performance, while materials (–2.1%), consumer staples (–1.6%) and energy (–0.4%) were the only sectors to decline. On a year-to-date total-return basis, all 11 large-cap sectors remain positive. The communication services sector leads with a 24.5% gain, while the health care sector is the weakest, up just 2.6%.
In the S&P MidCap 400, six of the 11 sectors advanced in September. There were 159 advancing issues and 242 declining issues—a 0.66 ratio, down from 2.58 last month. The spread between the best-performing sector (information technology, +6.3%) and worst-performing sector (consumer staples, –3.8%) was 10.1 percentage points. Communication services remains the top-performing mid-cap sector year to date with a 27.5% total return, while consumer discretionary is the weakest sector, down 3.6%. Communication services has also led sector performance over the last year, up 28.1%, while health care (–4.5%) trails all sectors.
In the S&P SmallCap 600, six of the 11 sectors gained during the month. The information technology sector (+9.6%) was the clear leader, while the consumer staples sector (–5.3%) lagged. Industrials hold the strongest year-to-date gain among the small-cap sectors (+11.9%), whereas consumer staples remains the weakest sector, down 12.4%. Breadth also deteriorated, with 209 advancing issues and 391 declining issues—a 0.53 ratio, down from 3.59 last month.
Industry and sector dynamics continue to play a pivotal role in company performance and stock valuation. The Model Shadow Stock Portfolio follows a deep-value micro-cap approach, emphasizing the price-to-book-value (P/B) ratio as its primary valuation screen. Financial stocks are excluded from the strategy, as their balance-sheet-based ratios are not comparable to those of nonfinancial firms. Consequently, the sector composition of the Model Shadow Stock Portfolio differs markedly from that of the S&P 500—and, perhaps surprisingly, sector weights also vary considerably across the three S&P indexes.
The table below provides the weighted-average sector weights of the Model Shadow Stock Portfolio as well as the three S&P indexes.
The table highlights sector weights to help visualize the dominant sectors across each index. Darker shading indicates higher representation. The 52-week price change column reflects the median performance of all companies within each sector. The final column displays the median price-earnings (P/E) ratio for each sector’s constituents, with darker red shading signifying higher valuations. Among valuation metrics, the price-earnings ratio provides a more meaningful comparison across sectors than the price-to-book ratio.
Performance within the S&P 500 is heavily influenced by the information technology sector. Although only 13.5% of the index’s companies fall within this sector, they represent a commanding 32.0% of total market capitalization. By comparison, the information technology sector accounts for 13.6% of the S&P MidCap 400, 15.0% of the S&P SmallCap 600 and 19.1% of the Model Shadow Stock Portfolio by value.
The information technology sector carries the highest median price-earnings ratio at 31.7, reflecting strong investor growth expectations. In contrast, financials stocks hold the lowest trailing price-earnings ratio at 13.0, indicating relatively modest valuation levels within the sector.
The current Model Shadow Stock Portfolio holdings are listed in the table below, grouped by sector.
The table below provides a more detailed view of the summary valuation levels and noteworthy performance ratios of the constituents of the S&P indexes and sectors.
Larger companies continue to trade at substantially higher valuation multiples than their smaller-cap counterparts. The median price-earnings ratio for stocks in the S&P 500 stands at 25.3, compared to 19.9 for the S&P SmallCap 600 and 14.3 for the Model Shadow Stock Portfolio. Higher price-earnings ratios typically reflect investor expectations for stronger future earnings growth and greater certainty—or lower risk—of achieving that growth. Smaller-company stocks generally trade at discounts because of higher perceived risk and lower liquidity, but they currently remain more attractively priced relative to large-cap stocks.
Over the past three years, mid-cap firms have shown slightly higher historical earnings growth rates, while large-cap companies in the S&P 500 exhibit stronger profit margins. The S&P SmallCap 600 has delivered the strongest positive earnings surprises, though mid- and small-cap firms have also experienced the largest downward earnings estimate revisions.
When analyzing price-earnings ratios, it’s important to remember that cyclical stocks often appear inexpensive near the end of an economic expansion, as investors anticipate slowing profits. Because trailing price-earnings ratios relate share price to past performance, they should be complemented by forward-looking measures and other valuation ratios to develop a more complete investment assessment.
Twenty-seven companies passed the initial Shadow Stock screen on October 13, up from 25 last month. Of the qualifying companies, 11 are currently held in the Model Shadow Stock Portfolio, compared to 10 in the prior month. Amplify Energy Corp. (AMPY) returned to the list after reporting positive quarterly earnings.
The Model Shadow Stock Portfolio targets micro-cap stocks trading at a price-to-book ratio below 0.90. Stocks are not removed until their price-to-book ratio exceeds 2.70 (three times the initial limit). As of October 13, 2025, Gilat Satellite Networks Ltd. (GILT) had the highest price-to-book ratio among portfolio holdings at 2.51. Gilat Satellite’s share price rose 38.4% in September and is now up 111.7% year to date, driven by strong earnings, strategic developments and favorable analyst sentiment. The company exceeded second-quarter 2025 earnings expectations, completed a major private share placement and integrated AI technology into its network management system to enhance efficiency and future growth prospects.
Stocks are also removed from the Model Shadow Stock Portfolio when their market cap exceeds $1.2 billion (three times the initial $400 million limit) at the time of a quarterly review, provided a suitable replacement is available. As of October 13, 2025, Gilat Satellite also had the highest market cap in the portfolio at $891.9 million.
The next quarterly review of the AAII Model Shadow Stock Portfolio will occur around the beginning of December after most holdings have reported third-quarter 2025 results. Any changes to the model portfolio will be announced via the Model Shadow Stock Portfolio Update email. Sign up to ensure you don’t miss it!
(10/01/2025)
Castor Maritime reported second-quarter 2025 diluted earnings of $0.10 per share, down from $1.02 per share in the prior-year quarter. Castor Maritime does not have earnings coverage by S&P Global. Total revenues were $17.9 million, up 10.2% year over year from $16.3 million, with revenue from services added as a new revenue segment.
(09/23/2025)
Ennis reported diluted earnings of $0.48 per share for its fiscal second-quarter 2025 ended August 31, up 20.0% year over year from $0.40 per share. Earnings were 26.3% higher than the S&P Global consensus estimate of $0.38 per share. Net sales were $98.7 million, relatively unchanged year over year from $99.0 million. Income from operations was $12.4 million, down from $13.2 million in the prior-year quarter.
(09/29/2025)
Escalade announced the acquisition of the Gold Tip business from Revelyst Inc., a collective of brands that design and manufacture sports technology and outdoor gear. Founded in 1989, Gold Tip is a leading manufacturer of products for target archery and bow and crossbow hunting.
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