Why 2025 Might Be the Year for Mid-Cap Stocks

As we navigate through an ever-evolving economic landscape, investors are always on the lookout for the next best opportunity. With prevailing uncertainties over interest rates and stock valuations, 2025 could emerge as a pivotal year for the often-overlooked segment of the market: mid-cap stocks. Defined as companies with market capitalizations between $2 billion and $10 billion, mid-caps might be poised to capitalize on current market conditions, presenting an attractive proposition for discerning investors.

Macro Trends Favoring Mid-Cap Stocks

Recent years have painted a polarizing picture for stock performance. Large-cap stocks, especially those driven by technology giants, have enjoyed remarkable growth. However, the S&P 500 is now trading at an approximate 22 times next year’s earnings, a figure that approaches a two-decade high. This exuberance has left some investors contemplating the sustainability of such lofty valuations.

On the other end of the spectrum, small-cap stocks may appear to be the bargain hunters’ dream, yet they come with their own set of challenges. With only about 60% of small-caps managing to post profits in recent years, their underwhelming performance has been a significant drag on overall returns. Herein lies the opportunity for mid-cap stocks—offering a middle ground that seems to balance risk and reward more effectively.

Attractive Valuations and Growth Potential

The iShares Core S&P Mid-Cap exchange-traded fund (ETF), a widely recognized index fund targeting this sector, is currently trading at a modest 16 times 2025 earnings, according to FactSet. This valuation indicates a substantial discount relative to large-cap counterparts. What makes this even more compelling is the analysts’ forecast for a robust 13% profit earnings per share growth in 2025 for mid-caps, paralleled closely to the S&P 500’s anticipated growth of 14%—a strong showing nonetheless.

According to analysts from BofA Securities, including Jill Carey and Nicolas Woods, it may indeed be “mid-cap’s time to shine.” With healthier balance sheets compared to small-cap peers, mid-cap stocks should demonstrate greater resilience against rising interest rates, presenting a pivotal investment thesis moving into 2025.

Domestic Focus and Market Sentiment

Another trend amplifying the attractiveness of mid-cap stocks is their potential to benefit from domestic economic policies. J.P. Morgan recently noted that the President-elect’s tariff agenda could provide substantial support to domestically-focused companies, further favoring both small- and mid-cap stocks over larger multinationals.

J.P. Morgan’s analysis highlighted various mid-cap stocks, including:

• Amphastar Pharmaceuticals – a leading drug company
• Dundee Precious Metals – a notable gold miner
• Dole – a prominent fruit company, trading at just nine times 2025 earnings

FactSet anticipates that Dole will achieve an impressive earning growth of about 15% this year, supported by a 12% free cash flow yield and a rapidly deleveraging balance sheet.

Successful Mid-Cap Investment Strategies

The Schwartz Value Focused fund, with a substantial $53 million in assets, has emerged as a top performer among mid-cap blend funds. In 2024, it yielded an impressive 39% return, predominantly due to its strategic bets on energy companies like Texas Pacific Land Corp. and Devon Energy, along with consumer-oriented brands such as Yeti Holdings.

Co-manager Timothy Schwartz asserts that Yeti, trading at merely 13 times expected 2025 earnings, deserves another opportunity from investors. After initial surges following its 2018 IPO, Yeti experienced a significant pullback in 2022 when its sales growth stagnated. Schwartz believes the company can return to delivering high-single- to low-double-digit sales and earnings growth, making it a compelling buy in today’s market.

Conclusion: A Case for Mid-Caps in 2025

The prevailing market dynamics showcase compelling opportunities within the mid-cap segment, offering attractive valuations, promising growth potential, and resilience in the face of rising interest rates. As large-caps face mounting pressure from high valuations and small-caps grapple with profit margins, mid-cap stocks may well emerge as the favored asset class in 2025. With macroeconomic trends favoring domestically-centered companies and rising interest rates, mid-caps could finally take center stage, providing savvy investors with much-needed upside potential.

As always, thorough research and strategic allocation are vital to navigating these turbulent waters effectively. 2025 may be the year to reconsider what once seemed like the forgotten middle-child of the investment world.