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Mid-Cap Stocks Set to Shine in 2025: Why Investors Should Pay Attention

Emilia Wright | January 17, 2025

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2025: The Year of Mid-Cap Stocks?

Amid uncertainties surrounding interest rates and stock valuations, 2025 could emerge as a promising year for the oft-overlooked mid-cap segment of the stock market. Defined as companies with market capitalizations between $2 billion and $10 billion, mid-caps may be positioned favorably compared to their larger and smaller counterparts.

The Current Market Landscape

Large-cap stocks, particularly those driven by high-flying tech companies, have enjoyed a remarkable run. However, the S&P 500 is currently trading at nearly 22 times the projected earnings for next year, which is close to a 20-year high. This valuation raises concerns for investors who might be wary of future growth prospects in this segment.

On the other end of the spectrum, small-cap stocks appear to be cheaper, but this discount comes with certain caveats. In recent years, about 60% of small-cap companies have failed to deliver profits, which has resulted in subpar returns and heightened risk. This contrast in performance between small and large caps sets the stage for mid-cap stocks, which may offer a more stable investment option.

Valuation Advantage of Mid-Caps

According to FactSet, the iShares Core S&P Mid-Cap exchange-traded fund (ETF), a well-regarded index fund that targets this sector, is currently trading at just 16 times the expected earnings for 2025. This more attractive valuation, combined with forecasted earnings growth of 13% for mid-caps — slightly below the 14% anticipated growth for the S&P 500 — paints a relatively positive picture for the sector.

BofA Securities analysts Jill Carey and Nicolas Woods expressed optimism in a recent note, stating, “It’s mid-cap’s time to shine.” They pointed out that midsize stocks typically feature stronger balance sheets, which could enable them to weather the potential challenges posed by rising long-term interest rates far better than their smaller-cap counterparts.

Support from Economic Trends

In alignment with this bullish sentiment, J.P. Morgan highlighted in a note this week that the tariff agenda of President-elect Donald Trump could potentially boost domestically-focused companies. This would favor both small- and mid-cap stocks over larger multinationals, which often bear the burdens of global trade tensions.

Highlighted Stocks to Watch

Several mid-cap stocks have caught the eye of J.P. Morgan’s small and mid-cap strategy team, including:

  • Amphastar Pharmaceuticals: A drug company benefiting from growth in specialty pharmaceuticals.
  • Dundee Precious Metals: A gold mining firm positioned to gain from rising commodity prices.
  • Dole: This fruit company trades at just nine times its 2025 earnings and is anticipated to achieve an impressive earnings growth of around 15% this year. Dole’s attractiveness is further highlighted by its 12% free cash flow yield and a rapidly improving balance sheet.

Performance of Mid-Cap Funds

The $53 million Schwartz Value Focused fund emerged as the top-performing mid-cap blend fund in Morningstar’s database for 2024, delivering a remarkable 39% return. The fund has made significant investments in energy, showcasing positions in companies such as Texas Pacific Land Corp. and Devon Energy. It has also expanded its holdings into consumer-oriented brands such as water-bottle maker Yeti Holdings.

Yeti experienced an initial surge after its IPO in 2018, but its stock price dropped sharply in 2022 when sales growth cooled off. However, Schwartz Value co-manager Timothy Schwartz believes that the stock, currently trading at only 13 times the expected 2025 earnings, deserves to be revisited. He commented, “Investors saw 30% growth and thought it would go on forever. When it didn’t, they bailed.” Nevertheless, Schwartz maintains faith that Yeti will deliver stable single-digit to low-double-digit sales and earnings growth moving forward. “It’s overlooked by the market,” he emphasized.

Conclusion

As the investing landscape becomes increasingly complex with fluctuating interest rates and varying stock valuations, mid-cap stocks seem to emerge as a compelling investment option for 2025. Mid-caps offer a balanced mix of stability, value, and potential growth, helping investors to navigate the uncertainties prevalent in today’s market. For those willing to take a closer look, the middle child of the stock market may finally gain the attention it deserves.