FPA Insights | March 2026
Rarely a day goes by without a new artificial intelligence (“AI”) headline. AI adoption continues to be robust, translating into revenue and (in some cases) earnings growth. For example, 2026 earnings growth for the Magnificent 7 is forecasted to be 26%, well ahead of the 14% growth for the rest of the S&P 500.1
Given this backdrop, some may be surprised that the Mag 7 declined 11% in Q1, far more than the 1% loss for the S&P 493. Meanwhile, small value stocks were up 5%.2
What explains this disconnect? One possible answer is valuations. According to Vanguard’s Capital Markets Model, U.S. small caps (and to a lesser degree “value” stocks) were squarely undervalued compared to broad U.S. equities to start the year. Even after their strong relative returns in Q1, US small caps are still undervalued (21st percentile as of 3/31 vs. 12th percentile as of 12/31).3
A Closer Look at Equity Valuations: Smaller Names Look Undervalued – As of March 31, 2026
Source: https://corporate.vanguard.com/. Setting realistic expectations: Where to find value in the U.S. markets. Published on April 22, 2026.4
Our FPA Queens Road Small Cap Value Fund (QRSIX) provides exposure to smaller domestic companies, while the go-anywhere FPA Crescent Fund (FPACX) has been steadily increasing its exposure to both domestic and international small- and mid-cap companies over the past two years.
Small caps remain overlooked amid constant AI headlines. If client portfolios have drifted toward mega-cap concentration, valuations suggest now may be a reasonable time to revisit the smaller end of the market despite their strong relative performance in Q1.
Feel free to reply directly to discuss how our strategies might be a good fit.
Endnotes:
1 Source: JP Morgan: Guide to the Markets – March 31, 2026. https://cdn.jpmorganfunds.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf
2 Source: Morningstar Direct
3 Source: Morningstar Direct
4 The valuation percentiles are as of December 31, 2025, and March 31, 2026.
The U.S. equity valuation measure is the current cyclically adjusted price/earnings (CAPE) ratio percentile relative to our fair-value CAPE estimate for the MSCI US Broad Market Index. Factor valuations are relative to U.S. equities as the base at the 50th percentile. Growth, value, and small-cap valuation measures are all based on the percentile rank based on our fair-value model relative to the market. The large-cap valuation measure is a composite valuation measure of the style factor to U.S. relative valuations and the current U.S. CAPE percentile relative to its fair-value CAPE. The emerging markets valuation measure is based on the percentile rank based on our fair-value model relative to the market. The ex-U.S. developed markets and global ex-U.S. equity valuation measures are the market-capitalization-weighted CAPE percentiles relative to our fair-value CAPE estimate for the MSCI EMU Index, MSCI UK Index, MSCI Japan Index, MSCI Canada Index, MSCI Australia Index, and MSCI Emerging Markets Index; the MSCI Emerging Markets Index is used only for global ex-U.S. equities. Source: Vanguard calculations using data from Robert Shiller’s website at aida.wss.yale.edu/~shiller/data.htm, the U.S. Bureau of Labor Statistics, the Federal Reserve Board, and Refinitiv, as of March 31, 2026.
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The Magnificent 7 (Mag 7) refers to a group of seven large, predominantly technology‑focused U.S. companies such as Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla that have had a significant influence on U.S. equity market performance due to their size, growth, and market leadership.
The S&P 493 is an informal term used to describe the performance of the S&P 500 Index excluding the Magnificent 7 stocks, representing the remaining 493 companies in the index and providing a view of broader market trends beyond the largest companies.
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