An often-overlooked corner of the stock market is poised for big gains after the Federal Reserve cuts interest rates, according to a team of stock-market strategists at Goldman Sachs.
The Goldman team expects mid-cap stocks will beat both large- and small-cap stocks after the Fed cuts interest rates. Senior Fed officials have suggested that the central bank will start lowering rates next week.
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“Mid-cap stocks have typically outperformed both large-caps and small-caps during the 12 months following the first Fed rate cut in an easing cycle,” the Goldman team wrote in a note to clients shared with MarketWatch.
Over the past couple of months, small caps have soaked up more of investors’ attention. They were the biggest beneficiaries of a rotation trade that rocked the market in July, although they have surrendered much of these gains since then.
But while some believe small caps could once again leap ahead of their large-cap peers once borrowing costs start to come down, the Goldman team sees midcaps as the better bet. Stronger balance sheets and more reliable profitability could help them outperform small caps. Meanwhile, attractive valuations could turbocharge the rally.
The MidCap S&P 400 index MID currently trades at roughly 15 times expected earnings over the next 12 months, toward the lower end of its historical range, the Goldman team said. That’s compared with 21 times for the S&P 500.
More than 90% of stocks in the midcap index were profitable over the past year, the Goldman team said. Meanwhile, roughly 60% of stocks in the small-cap Russell 2000 have continued to lose money.
Mid caps have outperformed small cap stocks so far in 2024, although both have lagged the S&P 500 by a considerable margin. The S&P 400 was up 6.4% through Wednesday’s close, according to FactSet. The Russell 2000 RUT was up 3.8%.
The S&P 500 SPX has gained 16.4%.
