Much ink has been spilled over the last 15 years on a single notion that has dominated the conversation regarding global stock market performance: ‘US exceptionalism’. It’s not altogether surprising. Performance has indeed been ‘exceptional’, in terms of both magnitude and duration. Including dividends, the S&P 500 has returned close to 600% over that 15-year period whilst, say, the FTSE All-Share has returned under 200%.
The US is the only country to have returned to its pre-pandemic potential growth path and has been the destination of choice for capital for some considerable time now. US stocks attained a peak of circa 75% of the MSCI World Index in February of this year (the next largest single country is Japan at under 6%). Investing globally has, essentially, become a bet on the US.
Bull markets don’t die of old age of course – there’s invariably a reason – and recent events (trade tariffs, valuations propelled to historically ‘uncomfortable’ levels, concentration risk concerns, artificial intelligence disruptions et al) are, needless to say, catalysing something of a rethink.
The S&P 500 has pushed to fresh record highs in recent weeks, yet much of that strength remains narrowly driven and richly valued, conditions that have historically left markets vulnerable. Against that backdrop, it is more than a little perplexing that one segment of the US market remains enduringly under-appreciated: mid-caps – and, more specifically, mid-cap value.
At the end of Q2 2025, mid cap stocks accounted for just over 20% of the market capitalisation of the Russell 3000 Index, which represents approximately 98% of investable US equities by market cap. Yet as a share of total U.S. equity assets, mid-caps made up only about 6% - less than a third of their ‘appropriate’ weighting. We use the phrase the “forgotten middle” with good reason.
The mid cap equity cohort represents a risk/return lifecycle ‘sweet spot’ within the US market. Below, we set out a ten-part rationale as to why now might be the time to rethink the addition of a strategic, dedicated US mid cap equity allocation to a broader portfolio of equity assets … a case made even stronger when examining the appeal of current relative valuations specifically.
1. Positioned to perform
Mid cap stocks have tended to outperform over time, with fundamentals – such as high return on invested capital (ROIC) or the ability to generate consistent, solid cash flows – proving to be a more reliable driver of returns than unfounded, or dare we say speculative, exuberance.
With an annualised return of 11.1%, the Russell Midcap Index has outperformed the large cap Russell Top 200 Index (10.7% annualised return), the Russell 1000 Index (10.8% annualised return) and the small cap Russell 2000 Index (9.2% annualised return) since the common inception date of 1st September 1992 (to 30 June 2025).
Taking the S&P 500, Russell 1000 and Russell 2000 indices over the 30 years to 30 June 2025, and then looking at one month performance, the Russell Midcap Index outperformed the other three indices in 26.1% of all one-month periods.
2. From alpha to beta
Mid-caps have historically outperformed both large and small caps while maintaining comparable risk levels. Over the past three decades, volatility for mid-caps has been only marginally higher than for large caps, and their risk adjusted returns (as measured by Sharpe ratio) have matched or exceeded large caps while significantly outpacing small caps. This balance of higher returns without a proportionate increase in risk makes mid-caps a strong candidate for long-term allocations.
3. Do you have the exposure you think you have?
Investors – both active and passive – may have lulled themselves into an erroneous belief that they have achieved adequate exposure across the full market cap spectrum. Active buyers commonly seek mid cap exposure by coupling a large cap manager with a small cap manager on the assumption that the former will trade down sufficiently below the cap scale for the benchmark, with the latter seeking to do the reverse. This view is at odds with reality however: the average large cap core strategy has a weighted average market cap of over $800bn, suggesting a strong bias for mega caps, compared to less than $80bn for the average mid-cap core strategy, whilst the average small cap core strategy has a weighted average market cap of just over $5bn, some way short of the aforementioned $80bn exhibited by mid cap.
Similar issues arise when adopting a passive approach. Broad-based indices like the S&P 500 and Russell 1000 are market-cap weighted and, consequently, their returns are dominated by larger stocks. The Russell Midcap Index comprises the smallest 800 companies in the Russell 1000 Index but, being market-cap weighted, the largest 200 stocks represent circa 80% of the index with the five largest accounting for circa 25%.
4. Ripe for re-rating
The potential of mid cap stocks has long been recognised as attractive takeover targets for larger businesses keen to diversify, grow market share, acquire innovative technologies, product lines or services, access new markets or achieve synergies, commonly resulting in a significant re-rating of the share price. Mid-caps are typically of sufficient size to be of meaningful strategic interest to a more substantial company but small enough to be acquired within a reasonable timeframe and at manageable cost. A mid cap target manifesting good earnings growth can also represent the opportunity for an acquirer to enhance its own earnings and financial performance.
Over the last ten years, the volume of takeovers diminishes significantly as the transaction size increases, with the volume of transactions over $10bn representing less than 5% of all transactions.
5. Under-analysed, not just under-owned
It’s long been the case that, relative to large cap stocks, mid-caps tend to enjoy markedly lower sell-side analyst coverage. For example, it’s not uncommon for institutional mandates to restrict investment in mid-caps, leading to less attention from institutional managers. While large cap stocks are heavily traded by institutional investors – and are often fully valued –market inefficiencies are more pronounced in the mid cap space. This allocation ‘blind spot’ results in wider variance in mid cap valuations and, as a result, a greater opportunity for the active investor to generate alpha.
6. Value is still inexpensive
As a sub-set of the broader mid cap space, valuations remain seductive for value stocks – indeed, value hasn’t been this cheap relative to growth since the bursting of the tech bubble, other than the outlier pandemic years of 2020 and 2021. As at the end of 2024, the Russell Midcap Value Index traded at 17.5x FY1 estimated earnings whilst the Russell Midcap Growth Index trades at 33.2x, a spread of 15.7. Contrast this with the fact that the average and median valuation spreads have been 9.8x and 6.7x respectively over the past 25 years.
It's by no means certain when, and to what extent, the valuation premium for large cap and growth stocks will recalibrate but it’s safe to say that the current differential stands mid cap value in good stead going forward.
7. A bigger pond to fish in
The size of an investment universe has a direct and obvious bearing on the likelihood of identifying stocks which fulfil one’s selection criteria. As ever, examining the index make-up is illuminating.
The variation in the number of constituent stocks within the Russell Midcap Growth and Russell Midcap Value indices over the last 20 years is dramatic. The number of stocks within the growth universe is 288, its lowest point over that period, and indeed ever, whilst the value universe has 713 stocks, currently almost 150% larger than 20 years ago.
8. A confrontation with concentration
Concentration risk is not an unfamiliar phenomenon these days – at the country, sector or stock level. An analysis at the sector level, for example, highlights important disparities. The Russell Midcap Growth Index now has a c 30% weighting to technology, the highest ever, and more than three times higher than its value equivalent. It’s difficult not to see this as a risk for allocators … but one that can be readily reduced by revisiting mid cap value where concentration levels remain in line with historic experience.
9. When the going gets tough …
A particularly desirable trait of mid cap value stocks is their resilience, and one need only cast one’s mind back to the dot-com bubble for validation. Prior to the bubble bursting, large cap growth stocks had overwhelmed their mid cap value counterparts; in the aftermath, however, mid cap value held up significantly better and then went on to produce a decade of impressive performance. Given the extent of large cap’s outperformance over the last ten years and the enduring enthusiasm for technology stocks, we’d argue that we are not in dissimilar territory today.
10. And finally …
There is good cause for optimism on a number of fronts. Analyst projections show mid cap earnings growth inflecting to the upside, with current year estimates exceeding large caps and, importantly, at lower valuations. Whilst key elements of the Trump administration’s policy remain difficult to predict, tariffs and other trade initiatives designed to stimulate US-based production are likely to prove advantageous, given that most US mid-caps are domestic. Similarly, whilst the prospect of declining corporate tax rates would bolster all US stocks, incremental tax breaks for US production would further benefit the mid cap cohort.
It's time to look again at that ‘forgotten middle’.
Mark Giambrone is the manager of the Barrow Hanley US Mid Cap Value Equity fund. The views expressed should not be taken as investment advice.