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Can Mid-Caps Continue to Outperform?


The sector is rocking and rolling. But will the music stop?

Neither too big nor too small, mid-sized companies look just right to investors these days.

Companies with market capitalizations between $1 billion and $5 billion have been dramatically outperforming their larger and smaller peers in recent months. In fact, year-to-date, the S&P 400 Mid-Cap Index is now up 20.8%, far outpacing the 11.4% and 13.1% gains of the large-caps and small-caps.

But why? Investment pros and market strategists offer different reasons for why the sector's performance has been so strong and, more importantly for investors, whether or not mid-caps can extend their lead.

Within the mid-cap sector, cyclicals have been the shining stars, with mid-cap energy up 41.9% year-to-date; mid-cap consumer discretionary up 39.3%; and mid-cap IT up 36.1%.

The more traditionally defensive, stable sectors like consumer staples and utilities have turned in weaker performances, says Sam Stovall, chief investment strategist at Standard & Poor's.

"In the beginning of a bull market, investors invest more on faith than on fundamentals, sounding more like Billy Graham than Ben Graham," Stovall tells Minyanville. "So investors gravitate toward stocks over bonds, small-cap over large-cap, and they focus on cyclicals over defensives. And we're seeing that here."

As for why investors are flocking to mid-caps, in particular, Stovall says emboldened stock-pickers might feel like taking some risk while still feeling more comfortable with companies that have a bit more heft to their size.

"They realize the benefits of small companies, but they are also feeling a bit nervous," Stovall says. "They want to maintain the security that large-cap stocks offer. So they are playing the middle of the road."

Looking ahead, earnings growth is expected to be stronger for mid-caps than large-caps, but the growth estimates for small-caps is substantially greater than mid-caps. Specifically, S&P analysts are looking for a 35% increase in operating earnings for large-caps next year; a 47% gain in mid-caps; and an 83% gain in small-caps.
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No positions in stocks mentioned.
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