Navigating the Calm: Strategic Entry Points in Undervalued Equities and Alternative Assets Amid Low Volatility

The global markets have entered a period of relative calm, as evidenced by the VIX index-a key barometer of investor sentiment-hovering near historic lows. As of January 2, 2026, the VIX closed at 14.51, down from 17.93 a year earlier and significantly below its 2008-2009 crisis peak of 80.86. This subdued volatility environment, while often seen as a sign of complacency, presents a unique opportunity for investors to identify undervalued assets across equities and alternative investments. By analyzing valuation metrics, sector rotations, and macroeconomic trends, this article outlines strategic entry points for capitalizing on the current market dynamics.

The Case for Equities: Small-Cap and Non-US Opportunities

The current low-volatility environment has amplified valuation disparities between large-cap and small-cap stocks. U.S. small-cap equities, as represented by the Russell 2000 Index (excluding biopharma), trade at a nearly 10% discount to the S&P 500- a level historically observed only during the Tech Bubble. Globally, small-cap stocks trade at a 26% discount to large caps in the U.S. (excluding unprofitable firms) and near record lows relative to large caps. These discounts are particularly pronounced in non-U.S. markets, where emerging market equities trade at a ~40% forward P/E discount to U.S. counterparts, below long-term averages.

The earnings growth outlook further strengthens the case for small-cap and non-U.S. equities. In 2025, small-cap stocks are projected to deliver 22% EPS growth compared to 15% for large caps, while international energy and industrials sectors trade at valuations significantly below U.S. benchmarks. For instance, the MSCI ACWI ex USA Index is valued at 14.6x earnings, versus the S&P 500's 22.8x, offering compelling exposure to sectors like industrials and energy.

Sector Rotation: Outperformers and Underperformers

Market rotations in 2025 have highlighted divergent sector performances. Communication Services, Industrials, and Health Care are rated as Outperform, driven by AI-driven demand, infrastructure modernization, and demographic tailwinds. Conversely, Consumer Discretionary, Real Estate, and Utilities face headwinds from consumer stress and regulatory challenges. This divergence underscores the importance of sector selection in a low-volatility environment, where concentrated returns in a narrow group of stocks have historically skewed market performance.

Alternative Assets: Real Estate and Energy Infrastructure

Alternative assets have emerged as critical diversifiers in a low-yield world. U.S. real estate, particularly multifamily and workforce housing, has seen a valuation recovery due to persistent housing shortages. In Q3 2025, REITs gained 5%, with health care, retail, and lodging sectors leading the charge. Meanwhile, energy infrastructure faces mixed dynamics: natural gas prices fell 9% in the quarter, but industrial metals like silver and zinc surged due to AI-related demand. Gold, a traditional safe-haven asset, rose 17% in the same period, reflecting its role as an inflation hedge.

Private market valuations also signal opportunities. While private buyout valuations in Q3 2025 reached 12.0x earnings (down from 12.8x in 2024), they remain elevated compared to 2023 levels. However, expected declines in late 2025 and 2026 could create entry points for high-quality assets as lower-quality holdings face balance sheet pressures.

Strategic Implications for Investors

The current low-volatility environment, while historically rare, demands a disciplined approach to asset allocation. For equities, the valuation discounts in small-cap and non-U.S. markets, coupled with favorable earnings growth projections, present compelling entry points. In alternatives, real estate and energy infrastructure offer diversification and income potential, particularly as public market yields remain constrained.