The last few days have brought more seismic shocks to growth stocks, continuing a trend seen throughout the last two months. On Friday alone, Amazon.com shed $15 billion of market value and a popular social media exchange-traded fund dropped 5.3%. Since this particular brand of sell-off began on March 5, the hardest-hit stocks have been US small- and mid-cap shares whose valuations depend more on future aspirations than on hard-nosed assessments of profitability. Conversely, the biggest, most boring US names—including more reasonably priced “quality” stocks like Microsoft and Procter & Gamble, and mega-cap value stocks like ExxonMobil and Caterpillar—have shrugged off the turmoil and continued their upward march.

While it is easy to chalk up the recent market moves to the simple reversal of an overly optimistic rally, we suspect that they are the warning shots of a more complex, long-run mean reversion process. Across global equities, we see evidence of historic valuation gaps that are likely to close over the next few years. Small stocks have rarely been as expensive as they are today, most notably within the United States. Growth stocks are also stretched relative to value stocks, especially outside the United States. As a whole, US stocks are themselves distinctly pricey compared to other major markets. Although the path back to “normal” is likely to be bumpy and long, these overextended relationships will not persist indefinitely.

While stretched valuations signal low expected returns for the most expensive categories—US small-cap growth shares are clearly the most vulnerable—they are the logical outcome of a world that has sought safety since the global financial crisis exploded in 2008. Small stocks are less directly exposed to the overall health of the global economy than are large multinationals. Growth shares offer the promise of equity performance that is tied more to technological progress and consumer tastes than to confidence in opaque banking systems. And just as the United States was the first major economy to enter the financial crisis, it has been the first to offer investors the hope of a strong recovery. There has been no better place to hide from worries about European debt and a Chinese growth collapse than in the shares of domestic US biotechnology and consumer discretionary stocks whose businesses seem immune to serious problems elsewhere.

Small, growing American companies are indeed more likely to shrug off external problems, but their shares are already priced for this perfect reality, even after recent drops. Trading at a Shiller price-earnings (P/E) ratio of 48 at the end of last week—a level surpassed only in the 1999-2000 dot-com bubble, 2007, and the most recent cycle—the Russell 2000 Growth® Index is the most overpriced segment of an already rich US equity market. According to our composite normalized P/E ratio, small-cap growth valuations soared by 34% in the 18 months heading into March before dropping by 9%. From here, they would have to drop in value a further 35% to reach their post-1978 median valuation. Equally notable is their valuation relative to the biggest, cheapest stocks in the United States, which in the most recent cycle has reached 20- to 30-year extremes, depending on the valuation metric used. While these statistics tell us nothing about timing, they do tell us that there is little “margin of safety” to speak of in many small US stocks. Investors looking for developed markets equity bargains should travel outside the United States and consider the EAFE value category, where stocks still trade at 13x normalized earnings despite recent gains.

Finally, it is worth noting that many shares with the biggest drops in March and April had been the best-performing over the previous 12 months. In other words, shares and funds exposed to the US momentum factor performed poorly (something you can read more about in our quarterly hedge fund update). To be clear, we view “growth” and “momentum” as two different concepts. “Growth” stocks, depending on the definition, at a minimum represent the more expensive half of the equity universe, and may also be experiencing rapid revenue or earnings growth. We expect growth stocks—especially those defined by the narrow “expensiveness” criterion—to underperform value stocks over very long time horizons. “Momentum” stocks, on the other hand, have simply performed well over recent periods. We expect momentum stocks to outperform cap-weighted benchmarks and growth stocks over very long time horizons. While momentum stocks are sometimes growth stocks, the relationship is not evergreen.

Jason Liebel is a Senior Investment Director on the Cambridge Associates Global Investment Research team.