Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / The Bull Market's Quiet Winners: Mid-Caps Take the Lead
Transcript
- Lucas: You look at the S&P 500 at 7,501 and the NASDAQ at 26,500 and you think — this bull market has legs. But look under the hood and something interesting is happening. The Russell 2000, which had been on a tear, actually slipped about 0.9% in the last five days. Meanwhile, the mid-cap index — the S&P MidCap 400 — is up roughly 8% year-to-date. Luna: So mid-caps are quietly taking the lead while everyone's watching small caps or the mega-cap tech names. Lucas: Exactly. And I think this shift tells us something about where we are in the cycle. Mid-caps — companies with market caps between roughly two billion and ten billion — they're kind of a Goldilocks zone right now. They have more pricing power and market access than small caps, but they're not as exposed to the regulatory and global headwinds that sometimes hit the largest multinationals. Luna: And the data backs it up. The S&P MidCap 400 is up about 8 percent this year, while the S&P 500 is up around 6 percent and the Russell 2000 is basically flat. What's driving that outperformance? Lucas: A few things. First, interest rates. The Fed funds rate is at 3.63 percent — down from last year, but still elevated. Mid-caps tend to have floating-rate debt, but they also have stronger balance sheets than small caps. So when rates stay higher for longer, mid-caps can absorb the cost better. Second, the composition of the index. The mid-cap index has a lot of industrial, financial, and healthcare companies — sectors that are benefiting from the infrastructure buildout and the insurance cycle. Luna: Give me a concrete example. Who's actually benefiting? Lucas: Take Pool Corp — ticker symbol p o o l. They distribute swimming pool equipment and supplies. With the housing market stabilizing and people investing in their homes, Pool Corp's revenue has been steady. Their stock is up almost 15 percent this year. Another is Brown & Brown, an insurance broker — ticker b r o w n. They've been gaining market share as property insurance premiums rise. That stock is up about 12 percent year-to-date. Luna: So mid-caps are benefitting from structural trends, not just a rising tide. But what about the concerns around a more hawkish Fed under the new chair, Kevin Warsh? The headlines are saying markets are bracing for a tougher stance. Lucas: That's a real risk. If the Fed signals it's not cutting rates as quickly as hoped, small caps could get hit hardest because they rely more on cheap debt. Mid-caps would feel some pressure, but their valuations are more reasonable. The median price to earnings ratio on the MidCap 400 is around 16 times forward earnings. That's not cheap, but it's not frothy either. And unlike the Russell 2000, the mid-cap index has positive earnings growth expectations for the next two quarters. Luna: So you're saying mid-caps offer a margin of safety that small caps don't right now. Lucas: I am. But I'd also point out that this isn't just a defensive play. Mid-caps are actually leading on the upside, too. Look at the last five days: while the S&P 500 was flat, the mid-cap index gained roughly one and a half percent. The Russell 2000 lost ground. So it's not just about downside protection — it's about active momentum. Luna: And that momentum is coming from earnings. Second quarter earnings haven't started yet, but early guidance from mid-cap companies has been fairly upbeat. Companies like Pool Corp and Brown & Brown are raising their full-year outlooks. Lucas: Right. But let's also acknowledge a potential pitfall. Mid-caps can be less liquid than large caps, and they're not as well-covered by analysts. So when you buy an ETF like the iShares S&P Mid-Cap 400 ETF — ticker I-J-H — you're getting broad exposure, but you might miss some of the individual stories. Active management could add value here. Luna: I'd add that the mid-cap space has some structural tailwinds from the M&A boom. Larger companies are looking to acquire mid-cap firms for growth, and that's providing a valuation floor. We've seen a few takeout premiums this year already. Lucas: Good point. And from a portfolio perspective, the mid-cap allocation is often underappreciated. Many investors over-weight large caps because of index replication, or small caps for growth potential. But mid-caps could end up being the sweet spot in a market that's expensive on the top end and volatile on the bottom. Luna: Before we move on — if you're listening and you've found our market breakdowns useful, especially as you think about your own portfolio decisions, we just want to mention that this show is ad-free and listener-supported. If you'd like to help us keep it that way, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a small gesture that goes a long way. Lucas: And it really does help us keep the conversation independent and focused on what matters. No sponsors, no agenda. So if you enjoy the show, consider chipping in. Luna: Exactly. And now, back to the market — we were talking about mid-caps, but there's another angle: the sector composition of the mid-cap index is actually quite different from the S&P 500. For instance, the mid-cap index has a higher weight in financials and industrials, and a lower weight in technology. Lucas: That's a key distinction. The S&P 500 is heavily tech-heavy — around 30 percent. The mid-cap index is more balanced. So if you're worried about a tech pullback — and some of the recent weakness in names like Cloudflare and Datadog suggests that might be happening — mid-caps offer a natural diversifier. They're not correlated one-to-one with the NASDAQ. Luna: And speaking of tech, the mid-cap index does have some tech exposure, but it's more in enterprise software and semiconductors — companies that are benefiting from AI spending but not at the nosebleed valuations of the mega-caps. Lucas: Right. And that's the final piece of the puzzle. Valuation discipline is coming back into fashion. The bull market this year has been led by a handful of mega-cap growth stocks. But as we've seen in past cycles, leadership eventually rotates. Mid-caps could be the next rotation target. Luna: So for listeners who want to act on this, what's the simplest way? Just buy the mid-cap ETF? Lucas: That's certainly an option. I-J-H or the Vanguard Mid-Cap ETF, ticker V-O, are both solid. But if you want to be more selective, look at the top holdings — companies like Pool Corp, Brown & Brown, and also Carlisle Companies in construction materials. They all have strong free cash flow and reasonable growth prospects. Luna: Carlisle — ticker c s l — is actually a great example. They make roofing and waterproofing products. With the infrastructure bill still flowing, they've been raising prices and expanding margins. Lucas: And their stock is up about 10 percent this year. So the story is consistent: mid-caps are leveraging specific industry trends rather than just riding the broad market wave. That's what gives this rally some durability. Luna: Alright, so to wrap up: mid-caps are outperforming, they're less rate-sensitive than small caps, more diversified than large caps, and they have earnings momentum. That sounds like a theme worth watching. Lucas: Absolutely. And as always, we'll be watching the Fed's next move and how it impacts the rotation. Thanks for tuning in.