Is any area of the market “affordable”?

Small- and micro-cap stocks have led the market for 14 months, with gains that have far outpaced large- and mega-cap indexes since last spring. Even after this strong run, valuation measures such as EV/EBIT still suggest these segments remain near long-term relative lows versus large caps, especially in small- and micro-cap value and core areas.

The backdrop is also improving on fundamentals, as more smaller companies are emerging from a multi-year earnings downturn and consensus forecasts point to stronger growth ahead. While investors may worry about overheated equity markets or comparisons to the internet bubble, the data still points to selective opportunity rather than broad excess.

For active investors with a long horizon, the combination of reasonable valuations and better earnings trends supports continued interest in this part of the market. The main risk is that leadership can shift quickly if growth expectations weaken or if broader market sentiment turns sharply lower.