Finding the Sweet Spot
Many investors tend to choose between large-cap stocks or their small-cap counterparts. However, there’s a third option that may be more appealing than many realize: mid-caps.
Many investors tend to choose between large-cap stocks or their small-cap counterparts. However, there’s a third option that may be more appealing than many realize: mid-caps.
- U.S. mid-cap equities have outperformed both large and small caps over the 30 years ending March 2025 (see Figure 1). In line with this, mid-cap earnings growth has outpaced small- and large-caps over the past three decades. We believe this may be because mid-caps often have capacity for further growth like small caps but have survived the perils of infancy with more seasoned management teams, proven business models, and access to capital like larger companies.
- The average number of sell-side analysts covering mid-cap stocks is about half that of large-caps (see Figure 2). In our view, this may lead to greater market inefficiency and more opportunities for active managers to generate alpha.
- Historically, the S&P MidCap 400 Index has traded at a 1% premium to the S&P 500 Index on a price-to-earnings (P/E) basis.2 However, as of March 2025, mid-cap stocks are trading at a sizable 28% discount to large-cap stocks (see Figure 3).
- Recently, large-cap stocks, represented by the S&P 500 Index, have outperformed mid-caps, represented by the S&P MidCap 400 Index, since the beginning of 2023 due to stronger earnings growth and enthusiasm around artificial intelligence. However, earnings growth for mid-caps is projected to accelerate over the next two years and could potentially outpace that of large-caps (see Figure 4).3 In our view, mid-caps may present a compelling opportunity for long-term investors by offering the growth potential of small-caps with the stability of large-caps.
1,3FactSet as of 3/31/25. Consensus EPS growth for the S&P MidCap 400 Index is projected to grow 9.5% in 2025 and 15.5% in 2026. Consensus EPS Growth for the S&P 500 Index is projected to grow 11.1% in 2025 and 14.5% in 2026.
2The historical average was calculated from April 2005 through March 2025 on a monthly basis.
The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of April 2025. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.
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The S&P 500 Index is an unmanaged index considered representative of the U.S. stock market without regard to company size. S&P MidCap 400 Index is an unmanaged index considered representative of mid-sized US companies. S&P SmallCap 600 Index is an unmanaged index considered representative of small-cap stocks. The S&P indexes are a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Fred Alger Management, LLC and its affiliates. Copyright 2025 S&P Dow Jones Indices LLC, a subsidiary of S&P Global Inc. and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. Investors cannot invest directly in any index. Index performance does not reflect deductions for taxes. The performance data quoted represents past performance, which is not an indication or a guarantee of future results.
Alpha measures the difference between a portfolio’s actual returns and its expected performance, given its level of risk (as measured by beta). Beta measures a portfolio’s sensitivity to market movements relative to a particular index; a portfolio with a beta of 1.00 would be expected to have returns equal to such index.
FactSet is an independent source, which Alger believes to be a reliable source. FAM, however, makes no representation that it is complete or accurate.
Price-to-earnings is the ratio for valuing a company that measures its current share price relative to its earnings per share.
Earnings per share (EPS) is the portion of a company's earnings or profit allocated to each share of common stock.
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