Midcap stocks could hit the sweet spot next year for investors looking for quality at an attractive price. Midcap stocks, which are loosely defined as companies with market capitalizations between $2 billion and $10 billion, are often considered the overlooked middle child in the asset class universe, squeezed between their large-cap and small-cap peers. Lately, however, they’ve been outperforming. The SPDR S & P Midcap 400 ETF Trust (MDY) and the iShares Core S & P Mid-Cap ETF (IJH) rallied 7.5% this quarter, better than the S & P 500’s 5.6% gain, though weaker than the Russell 2000’s 8% advance. In November, the MidCap S & P 400 notched its best month of the year. MDY YTD mountain MDY Many investors expect further gains for midcaps as the market continues to rotate. They say medium-size companies offer better quality businesses than small caps, as well as better growth than large caps. “Our fundamental view on mid-caps is that we want to invest in companies that do all the hard work for us, essentially, and own them for a long period of time,” said Thomas Browne, portfolio manager at Keeley Teton Advisors who runs a small-cap and midcap fund. “From a near-term perspective, we think mid-caps are attractive today, particularly relative to larger caps.” Sweet spot Many investors heading into 2025 worry the S & P 500 is overvalued, after notching more than 20% advances this year and last year. Wall Street strategists who have trotted out their outlooks thus far expect the broader index will return roughly 10% in the coming year. But midcaps are more attractively valued. Browne noted the S & P 400 is trading at roughly 79% of the S & P 500 on a forward P/E basis, when it historically traded at roughly 107% of the broader index over the past 20 years — meaning midcaps will have to eventually close the performance gap of 28 percentage points. Browne expects this will happen over a period of five years. Similarly, small caps are trading at roughly 82% of a long-term average 113%. However, midcaps are less risky than small caps, given that the Russell 2000, for example, is made up of many companies that are over-leveraged, with unproven business models. “There are so many junky companies in [the Russell 2000], and they could benefit theoretically here, but we would prefer to stay a little bit higher quality in terms of companies,” said Luke O’Neill, portfolio manager at Catalyst Dynamic Alpha Fund. “We don’t think we’re going to have a junk stock rally anytime soon.” O’Neill said a pivot to bigger rate cuts from the Federal Reserve than investors are currently anticipating could mean a rally in the Russell 2000, but the portfolio manager said he prefers to stick with quality companies. Stock picks O’Neill, who said his fund has roughly 40% to 50% exposure to midcap stocks, is bullish on several stocks. One pick is Ralph Lauren , the American luxury fashion company. O’Neill said the company has “double-digit growth potential over the next few years” as a corporate restructuring and a more premium presence in Europe boosts the stock’s growth potential. The stock is up 58% this year, and is a consensus buy on the Street, according to LSEG. Another pick is Evercore , a midsize investment bank, that O’Neill said is no longer cheap, but can get a boost from President-elect Donald Trump’s pro-business stance. Keeley Teton Advisors’ Browne named Columbia Banking System and Gen Digital as favorite stock picks.
