If you look at the Shiller CAPE P/E values, the large-cap market looks expensive. If you look at small-cap stocks excluding the largest Mag 7 stocks, the market seems better positioned. Now that the small-cap risk premium has fallen, some have questioned its validity, but the number suggests a closer look.
If we just look at the 493 SPX stocks outside the Mag & there seems to be more value broadening investor focus. Of course, earnings for the Mag 7 have been higher, which justifies holding these stocks. Additionally, small-cap value and growth have not been rewarded. To hold these smaller-cap names, you truly have to believe that current P/E valuations are a strong predictor of short-term stock performance. Perhaps that is the case over the next five years, but it is a stretch for the next year.
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