Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why This Bull Market Is Rotating Toward Mid-Caps
Transcript
- Lucas: You know, Luna, everyone's been staring at the mega-caps this week, but the real story in this bull market might be hiding in the middle of the market cap spectrum. Luna: Mid-caps? I feel like they've been the ignored middle child for the past few years. What's changing? Lucas: Well, look at the numbers from this week. The S&P 500 is up about 5.8 percent in five days, the NASDAQ is up 8.6 percent, but the Russell 2000 only gained about 4.5 percent. Yet when you drill into specific mid-cap names, you see moves that dwarf those indices. CrowdStrike is up nearly 17 percent in five days. Palantir up over 32 percent. Meanwhile, Shopify, a mega-cap darling, is down almost 7 percent. Luna: That's a massive divergence. So it's not just a risk-on rally, it's a selective one. Lucas: Exactly. And if you're getting something useful out of these conversations, the way we keep this show ad-free is through listener support. You can buy me a coffee at buy me a coffee dot com slash fexingo. Luna: Yeah, that really helps us keep doing what we love. And honestly, these market insights are worth a coffee. Lucas: So let's dig into why mid-caps are suddenly leading. Some of it is the AI trade broadening out beyond the usual suspects. CrowdStrike, that's cybersecurity, and Palantir, that's data analytics. These are companies that are directly benefiting from AI spending, but they're not the mega-cap tech giants that everyone's already piled into. Luna: So investors are looking for AI exposure but they're not willing to pay mega-cap valuations for it? Lucas: Precisely. The mega-caps have gotten so expensive that some investors are rotating into mid-caps that have similar growth prospects but lower price to earnings ratios. And you see this in the data. The iShares Russell 1000 Growth ETF, which holds a lot of mega-cap growth, is up about 9 percent this week. But the Vanguard Growth ETF, which skews a bit more mid-cap, is up about 8.6 percent. And the ARK Innovation ETF, which is heavily weighted toward mid- and small-caps, is up over 8 percent as well. Luna: So the whole growth complex is rallying, but the mid-caps are holding their own. What's the catalyst? Lucas: I think part of it is the Fed. The fed funds rate has been flat at 3.63 percent for months now, and Philadelphia Fed President Paulson said he's content with rates at current levels. That's given investors confidence that the rate cycle is done, which is good for longer-duration assets like growth stocks. But it's also giving investors room to look beyond the mega-caps that have dominated for so long. Luna: So it's a risk-on rally, but with a twist. Instead of just piling into Apple and Microsoft, people are looking at names they might not have considered before. Lucas: Right. And that's a healthy sign for the bull market. When you see concentration in a few mega-caps, that's a risk. But when the rally broadens out, it suggests that the market is finding value in more places. The S&P 500 is up 5.8 percent this week, but the NYSE composite, which includes a lot of mid-caps, is only up 2.3 percent. So it's not a blanket rally, but within sectors, you're seeing these pockets of strength. Luna: But not all mid-caps are created equal. I mean, Shopify is a mid-cap now, and it's down almost 7 percent this week. Lucas: That's a great point. Shopify is a perfect example of how the AI trade isn't a rising tide for everyone. Shopify's been struggling with growth, and investors are worried about competition from ai driven e-commerce platforms. So it's not just about size; it's about whether a company is positioned to benefit from AI or be disrupted by it. Luna: So when you look at a stock like Palantir, up 32 percent in a week, that's not just momentum. There's a fundamental story there about AI adoption. Lucas: Exactly. Palantir's software is used for ai driven data analysis, and they've been landing big government and corporate contracts. The market is rewarding that. Similarly, CrowdStrike is benefiting from increased cybersecurity spending as companies worry about ai powered threats. So the market is rewarding companies that are directly monetizing AI, not just those that are using it. Luna: But with that kind of move in a week, you have to wonder if it's sustainable. I mean, Palantir up 32 percent in five days is a huge move. Lucas: It is, and that's the risk. When you see a stock move that much that quickly, it can be a sign of speculative excess. But it can also be the beginning of a longer-term re-rating. The key is to look at the fundamentals. Palantir's revenue growth is still strong, and their profit margins are improving. So it's not just a story; there are numbers to back it up. Luna: So what should an average investor do with this information? Is it time to dump the mega-caps and pile into mid-caps? Lucas: I wouldn't say dump, but it might be time to rebalance. If you're heavily concentrated in mega-cap tech, you might want to take some profits and look at mid-caps that have similar growth potential but are less crowded. But you have to be careful about chasing momentum. Just because a stock is up huge this week doesn't mean it's a good buy right now. Luna: So it's more about finding the right entry point and not just buying the hottest stock of the week. Lucas: Absolutely. And one way to do that is to look at ETFs that give you diversified exposure to mid-caps. There are a lot of good ones out there that track the S&P MidCap 400 or the Russell MidCap index. That way you're not betting on any single company; you're betting on the trend. Luna: But even with ETFs, you have to be aware of the underlying holdings. Some mid-cap ETFs are heavy in tech, which might be more volatile. Lucas: That's true. You have to look under the hood. But overall, I think this rotation is a positive sign for the bull market. It shows that investors are confident enough to look beyond the safe mega-caps and take on a little more risk. And that's typically what happens in the later stages of a bull market when the easy gains have been made. Luna: But isn't that also a warning sign? I mean, late-stage bull markets can get frothy. Lucas: It can be a warning sign, but it's not necessarily a reason to panic. The market is still up, the economy is growing, and inflation seems to be under control. The real risk is if investors get too greedy and bid up stocks to unsustainable levels. But right now, the rotation into mid-caps seems more like a rational search for value than irrational exuberance. Luna: So what's your take on the next few months? Do you think this trend will continue? Lucas: I think it will continue as long as the Fed stays on hold and corporate earnings remain solid. We just saw real GDP growth at 1.5 percent annualized, which is slower than the previous quarter but still positive. And with the Fed comfortable with rates, there's no reason for the market to pull back sharply. But we have to watch for any signs of inflation picking up, which could change the Fed's stance. Luna: Yeah, the Fed is key. If they even hint at a rate hike, that could hit mid-caps harder than mega-caps because they're more sensitive to interest rates. Lucas: That's right. Mid-caps often have more debt and less pricing power than mega-caps, so they're more vulnerable to rate increases. But if the Fed stays put, the rotation should continue. And there's also the political factor – with the midterm elections coming up, there might be more volatility. Luna: Speaking of politics, I saw that Polymarket is raising funds at a $20 billion valuation. That's interesting, but it also shows how prediction markets are becoming more mainstream. Is that related to the bull market? Lucas: Not directly, but it's an example of how financial innovation is thriving in this environment. Investors are willing to put money into new platforms, which is a sign of confidence. And that confidence is part of what's driving the bull market. But it also creates risks if these platforms don't live up to expectations. Luna: So we should keep an eye on that too. But back to mid-caps – what are some names you're watching besides the ones we've mentioned? Lucas: I'm looking at companies in the software and data analytics space that are growing quickly but aren't as well-known as CrowdStrike or Palantir. Names like Cloudflare, which is up about 10 percent this week, or Datadog, up almost 9 percent. They're benefiting from the same AI tailwinds but are still reasonably valued compared to the mega-caps. Luna: Those are good examples. But it's also important to remember that past performance isn't a guarantee of future results. Lucas: For sure. That's why I always say to do your own research and think about your risk tolerance. The bull market is great, but it can turn quickly. And if you're investing in mid-caps, you need to be prepared for more volatility. Luna: So what's the bottom line for our listeners? Is this a good time to consider mid-caps? Lucas: I think it's a good time to be selective. Don't just chase the hot names. Look for companies with strong fundamentals that are benefiting from long-term trends like AI, but also have reasonable valuations. And consider using ETFs to diversify your exposure. The key is to be thoughtful and not get caught up in the hype. Luna: Well said. And thanks for breaking this down, Lucas. It's easy to get lost in the noise of the daily moves, but this gives us a clearer picture of what's really driving the market. Lucas: Glad to help. Remember, the market is always evolving, and staying informed is the best way to navigate it. Until next time.