As Style Box Indexes Nudge Toward Their Fair Value, What’s Behind the Shift?

Key Takeaways

• Across the Morningstar style box indexes, stock prices have nudged closer to their fair values.
• Small-cap value, which has been undervalued for nearly all of the past eight years, remains the most discounted segment of the market.
• Morningstar equity analysts have been raising price targets on key large-cap growth names, leading to lower relative valuations.

Across the stocks in the

Morningstar Style Box

, long-held gaps in valuations have narrowed, leading to a market with fewer very cheap and very expensive corners.

Large-cap growth stocks, which began 2025 about 13% overvalued, have since dropped to roughly 4% undervalued, while mid-cap growth stocks have moved from 10% overvalued to fairly valued. Small-cap value stocks, however, have climbed from 19% undervalued to 10% undervalued, and mid-cap value stocks have moved from 10% undervalued to about 5% undervalued.

The full range of valuations across the style box can be found at the bottom of this article.

What’s Driving the Convergence Toward Fair Value?

Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth, says several factors have helped push prices closer to fair value. One major factor is the small-cap stock rally that followed the underperformance seen in the first 10 months of 2025. The Morningstar US Small-Cap Index has climbed 8.0% since Nov. 1, more than triple the 2.4% return on the market overall.

Pappalardo says this rebound comes on the back of lower interest rates, which tend to benefit smaller companies more quickly and directly, since much of their debt is floating rate. Coupled with expectations that the current administration will take a more lenient stance on corporate mergers and acquisitions, these factors have tended to make investors look more favorably on small caps.

In contrast, large-cap returns have recently stalled, with the Morningstar US Large Cap Index up 1.4% since Nov. 1. The technology giants that have propelled large caps higher have slid more recently amid concerns that AI-related companies won’t be able to deliver on their lofty promises. These include Nvidia NVDA, which has dropped 5.4%, Apple AAPL, which has dropped 5.1%, Microsoft MSFT, which has lost 6.8%, and Broadcom AVGO, which has declined 9.7%.

Fair Value Estimates Hiked on Select Large-Cap Growth Stocks

Pappalardo says Morningstar equity analysts have begun to raise price targets on key large-cap growth stocks. “Recent developments and ongoing product demand have changed the inputs in the valuation models,” he explains. “As fair values for large-cap growth companies are increased, the price/fair value ratio mathematically declines.” Over the past three months, Broadcom saw its fair value estimate increased by 32%, Apple saw a 14% hike, and Alphabet GOOGL/GOOG saw a 13% bump.

The recent moves suggest a broader rebalancing across the market. Pappalardo says: “It’s noteworthy that as gaps between the overvalued and undervalued segments narrow, they are all generally moving closer to fair value. This means that most overvalued areas are becoming less expensive while the most undervalued areas are rallying. This is a normal market dynamic, as it suggests investors may be taking gains on names that have exhibited very strong performance and rotating proceeds into less favored segments. Behavior such as this can help limit bubbles or extreme valuation environments which typically don’t end well.”

Small-Cap Value Remains the Most Undervalued Style Box Segment

Despite inching closer to their fair value in recent months, small-value stocks remain the most undervalued part of the style box. The segment trades at a 10% discount and has spent close to the entirety of the past eight years in undervalued territory. Small-value stocks briefly slipped into overvalued territory in February 2021, but valuations reversed by October and continued to fall, bottoming out at a 35% discount in September 2022.

Small-value returns have consistently lagged the broader market over the past decade, underperforming in seven of the 10 calendar periods. However, Pappalardo notes that this is more of a testament to the historical bull run in large-cap growth (particularly the “Magnificent Seven”) than an indictment of small-cap value.

As for why small-value stocks have consistently lagged their own price target, Pappalardo says there are a number of potential factors at play:

• Small value sits definitionally farthest from large growth, so it’s intuitive that as large growth led the market higher, small value was the most disconnected.
• Tech stocks—the primary drivers of the bull run—have carried relatively little weight in the Small Value Index, accounting for roughly 4%–8% in any given year over the past decade, compared with about 15%–35% in the broader US market.
• As small-cap stocks underperform and valuations fall, they may be reclassified into the value category faster than their fair value estimates can be adjusted.

Beware a Pure Price/Earnings Judgment

Pappalardo notes that while price/fair value is a useful lens with which to assess valuation differences across market segments, it’s not the only one. “Price/fair value requires subjective input from analysts to establish the fair value component,” he explains. “A more objective measure is to look at fundamentally driven valuations, such as price/earnings ratios.”

Pappalardo continues: “The gap between large caps and small caps looks much wider through this lens. The small cap P/E ratio ended 2025 at approximately 0.65 of the Large Cap Index—the lowest ratio seen in the last 25 years. On average, the ratio is around even, or 1. There was a lengthy period when small caps traded at a higher P/E-driven valuation than large caps, from 2003–2018, peaking at a ratio of 1.22 relative to large caps.”