Mid-cap managers are hoping stocks will benefit from a more business-friendly administration under President-elect Donald Trump.Torsten Asmus/iStockPhoto / Getty Images
The Magnificent Seven technology behemoths have lived up to their moniker with a massive gain of more than 75 per cent so far this year.
But investors may want to broaden their U.S. exposure beyond the pricey mega-caps – Alphabet Inc. GOOGL-Q, Amazon.com Inc. AMZN-Q, Apple Inc. AAPL-Q, Meta Platforms Inc. META-Q, Microsoft Corp. MSFT-Q, Nvidia Corp. NVDA-Q and Tesla Inc. TSLA-Q – to the often overlooked and less expensive mid-cap sector that has potential tailwinds.
Jeff Mo, portfolio manager at Calgary-based Mawer Investment Management Ltd., says he’s “cautiously optimistic” about the setup for U.S. mid-caps next year.
“My outlook is incrementally more positive than it was six months ago,” says Mr. Mo, who oversees Mawer U.S. Midcap Equity Fund and Manulife U.S. Mid-Cap Equity Fund.
U.S. mid-caps should benefit from the U.S. Federal Reserve Board’s interest rate cuts and the perception of a more business-friendly administration under president-elect Donald Trump, he says.
In a study by Mr. Mo’s team going back 30 years, the Russell Midcap Index outpaced the S&P 500 index over the two- and five-year periods after the central bank started cutting interest rates.
“Companies with more opportunity to grow tend to do better when there’s an easing of monetary conditions,” he says. As for more business-friendly policies emerging, there’s always a lag so that would be “more of a 2026 story.”
The Russell Midcap Index, which tracks around 800 companies and is the benchmark for many actively managed U.S. mid-cap funds, is up 17 per cent this year versus 27 per cent for the S&P 500.
U.S. large-cap stocks have become more expensive due to flows from passive exchange-traded funds going into the S&P 500 companies, he says.
Small-caps offer better value than mid-caps, but the downside is that 40 per cent of the names in the Russell 2000 Index are not profitable versus 15 per cent in the mid-cap index, he says. “If you want to find the next Magnificent Seven stock, it’s probably a U.S. mid-cap today.”
Mr. Mo says he’s finding attractive opportunities in the consumer discretionary, industrial and financial sectors.
One name he likes is SharkNinja Inc. SN-N, a small-appliance maker known for its Ninja blenders. Its competitive edge stems from having engineers in Boston, London and near Shanghai, so it can do 24-hour research and development, he says.
SharkNinja can take a product from conception to market in about nine months, he says. “It has only been around for about 20 years but has grown organically very rapidly.”
Mr. Mo also likes payments-processing company Corpay Inc. CPAY-N. It issues special payment cards to businesses such as trucking companies for their employees to pay fuel expenses, but the exciting part is its fast-growing digital business-to-payment system, he says.
CACI International Inc. CACI-N, an information technology defence contractor, is also a top holding. Its defensive and offensive strategies include jamming drone communication, cybersecurity and securing wireless communication in a war zone.
“CACI is compelling because the war in Ukraine is causing people to realize that software and signals intelligence may be even more important than hardware,” he says.
Phil Taller, senior vice-president and head of the growth team at Toronto-based Mackenzie Investments, says it’s tough to predict if U.S. mid-caps can outperform their larger peers next year, but there are catalysts for the small- and mid-cap universe.
“People have made a lot of money owning large-caps, especially those mega-cap tech companies,” but history shows nothing goes up forever, says Mr. Taller, co-manager of Mackenzie U.S. Mid Cap Opportunities Fund and Mackenzie U.S. Small-Mid Cap Growth Fund.
U.S. mid-caps are generally an underinvested sector, he says, but it’s a great hunting ground for larger, mature firms to acquire companies with faster growth rates.
Mid-cap companies could benefit from more corporate merger-and-acquisition activity expected under Mr. Trump, who has promised less regulatory scrutiny, Mr. Taller says.
The Federal Trade Commission under President Joe Biden has been “anti-merger” and discouraged companies from deal-making, he says.
“Historically, the standard for a merger was whether it had an impact on competition, but in recent years it has been more about whether the merger serves the policy interest of the administration.”
Smaller banks, which are regulated by the U.S. Consumer Financial Protection Bureau, could also benefit from relaxed regulation that could reduce costs and help profitability, he adds.
If Mr. Trump lowers corporate taxes, that would be positive for U.S. mid-cap firms that have a more domestic focus, he says. “Larger companies are more multinational in their operations and thus have generally a lower tax rate.”
Mr. Taller, whose strategy focuses on firms generating lots of free cash flow and are not capital intensive, sees attractive opportunities in the health care, industrial and information technology sectors.
Hologic Inc. HOLX-Q, a medical technology company with a focus on women’s health, benefited from selling equipment for testing COVID-19 during the pandemic, he says. Now, there’s an opportunity to sell other tests to run on those same machines and from sales from a new model of its breast-imaging machine.
Mr. Taller also likes Akamai Technologies Inc. AKAM-Q, an information technology company. The market is overly focused on its maturing content-delivery business, he says, but more than half of sales come from cybersecurity and cloud-computing services.
ExlService Holdings Inc. EXLS-Q is a non-cyclical industrial company, he says. It used to be more of a call-centre business but has evolved into a data analytics company focused on areas such as insurance, which has helped win clients.
Despite an improving outlook for U.S. mid-cap stocks, a weakening economy is a major headwind, although that would affect the market generally, Mr. Taller says. “Usually, it’s when interest rates go up a lot.”
Mr. Mo says the biggest risk is that Mr. Trump’s tariff threat could dampen growth because many consumer and industrial products are imported into the U.S.
“The tariffs apply to the source of the manufacturing and not the ownership of the factory,” he says.