Growth and Stability With Mid-Cap Stocks

The headline number for stock performance revolves around the S&P 500 Index, which represents 500 of the largest U.S. publicly traded companies. This can be a useful large-cap stock index for investment purposes, and is largely indicative of the direction of equity asset prices. 

However, the S&P 500 Index has limitations as a performance benchmark, and serves as only one of many asset classes in a globally diversified, strategically allocated portfolio. Mid-cap stocks, for example, can potentially offer future expected growth exposure not typically offered by larger companies, and can introduce a risk/return profile that is complementary to the S&P 500 and other asset classes in a diversified portfolio.

The Strategic Value of Mid-Cap Stocks

Mid-capitalization stocks comprise the shares of companies with a market value between $2 billion and $10 billion. As a broad generalization, they are often more growth-oriented than larger, more mature companies, and also often more stable and with stronger balance sheets than small start-up companies. As such, they provide a nuanced diversification benefit in an investment portfolio. This may be particularly true at a time when large-cap stock indices are sitting at all-time highs and are relatively expensive by many metrics from a historical perspective. 

The Tactical Value of Mid-Cap Stocks

As noted in the Wall Street Journal, while mid-cap stocks averaged a price-to-earnings ratio that was 1.04 times that of the S&P 500 over the past 25 years, "that ratio is now only 0.68 times that of the S&P 500." Additionally, mid-cap companies tend to require more borrowed money than large-cap companies, so an anticipated decrease in interest rates in 2024 could provide macro tailwinds to benefit mid-caps.

An Informed Investment Approach

Stocks of companies with mid-cap valuations may provide beneficial exposure, both strategic and tactical, moving into 2024 and beyond. Investors should incorporate a comprehensive assessment of their financial objectives, time horizon, and risk tolerance when making portfolio allocation decisions.

- Tony Winkels is Managing Partner and Wealth Advisor at Fortis Wealth Management