From GMO's latest quarterly review:
From a strategic perspective, the current overpriced environment makes asset allocation decisions neither simple nor comfortable. Having established that we are once again in a world of narrow risk premiums, it is not hard to look back at history and pinpoint times where current valuations led to steep falls in prices. The problem, of course, is that we can also find previous episodes where markets continued to rally, albeit still delivering poor longer-term returns. This stark choice is made even more bleak by the dearth of safe assets offering reasonable returns to hold while sitting out the ongoing stock market levitation. As a result, we are forced to hold more equities than we would prefer at these absolute valuations for the simple reason that we could be in for a long sideways grind where growth eventually closes the valuation gap. In that scenario, real equity returns will likely be meager, but at least positive. One group that we refuse to hold, however, is global small cap stocks and, in particular, U.S. small caps. On our data, U.S. small cap stocks are now as expensive as we have ever seen them. Perhaps more surprising still is the deafening silence about this distinctly frothy group. Although the S&P 500 price index is still some way below its all-time high, U.S. small caps are within spitting distance of theirs: a high that was last reached with a booming global economy, strong employment, and a debt-driven consumption binge in full swing.
All this and much more in the full thing: