Can you middle? I first heard the concept of a “middler” from an episode of Curb Your Enthusiasm—an HBO show—and it made me laugh out loud. If you’re at dinner, sitting in the middle, it’s up to you to keep the conversation flowing. Without it, awkward lulls can ensue. 

The same holds true for mid-cap stocks. And right now, I believe mid-caps are middling well, striking a balance between established operations, attractive valuations, and growth potential. This is because they tend to have the infrastructure in place to scale up like large caps, but with growth characteristics similar to and easier access to capital than small caps. Plus, because many mid-cap companies aren't household names, they can provide active investors with opportunities to find hidden gems. 

The definition of mid-cap equities may vary, depending on who you ask. Typically, these companies have a market capitalization between $2 billion and $10 billion. For our purposes, we use the S&P 400 Index as a proxy, which includes firms with market caps ranging from $1 billion all the way to $23 billion. Rebalancing can eventually push stocks up to the S&P 500 or down to a small cap index like the S&P 600.

What do you get with mid caps?

Mid-cap companies tend to be more closely tied to the U.S. economy than their large-cap counterparts. Industries like capital goods (15%), real estate (7%), materials (6%), diversified financials (6%), and banks (6%) make up about 40% of the mid-cap space, positioning them to benefit from domestic growth. As such their performance closely aligns to changes in U.S. industrial production (see chart).

In fact, mid-caps derive a higher percentage of their revenue from U.S. customers compared to large caps. According to the S&P Dow Jones Indices, 26% of mid-cap revenue comes from abroad, while large caps pull in 29% from international markets.

While the S&P 500 or large cap equities have been the top performer for the current cycle (driven largely by AI-themed stocks), mid-caps have outperformed them over the long-term. As it stands today, mid-caps are now trading at their largest discount since the early 2000s tech boom. We may be approaching a turning point, as mid-caps have started to outperform their larger counterparts in the latter half of this year.

The fact that the U.S. economy has remained strong—with the GDP NOW tracker forecasting 3.2% growth for the third quarter—increases the odds of this being a longer trend. A key factor in mid-cap performance will be a resurgence in manufacturing sentiment. Sentiment has been stuck in contractionary territory, as high interest rates have curbed businesses' willingness to invest in capital and inventory. As the Fed begins cutting rates, businesses may become less reluctant to make these investments. Coupled with favorable valuations, this could pave the way for continued mid-cap outperformance—aka middling well.