By Spencer Jakab
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One of the more interesting opportunities in the stock market is easy to miss.
While it seems like all the attention has been on the S&P 500, and especially AI-related stocks, some have at least pointed out bargains in small-capitalization companies. Is there something we've overlooked?
Yes: everything in-between. Mid caps are like the Jan Brady of the stock market. They lack the size and name recognition of the blue chips but are no longer as trouble-prone as small companies. The category is lightly covered by Wall Street analysts and index funds focused on mid caps are tiny.
"That's what we like about it-it provides a lot of opportunities to find mispriced gems," says Andy Romanowich, a mid-cap fund manager at Madison Funds.
The five largest companies in the S&P 500 have an average of 66 analysts producing earnings forecasts, according to FactSet. Their counterparts in the S&P 400 average just 15. Some farther down the list have hardly any coverage at all.
Similar to small caps, the group has languished over the past five years. But mid-cap companies tend to be financially sturdier, and they're nearly as cheap. The S&P 400 trades at a 28% discount to the S&P 500 on trailing earnings.
Over the past five years, the S&P 500 has returned 95% compared with 56% for mid caps. In the preceding quarter century, though, mid caps were superb. A dollar invested in the S&P 400 grew to be worth more than $15 compared with less than $10 in the S&P 500.
Like small caps, the category tends to shine after large company valuations get stretched enough to worry investors, as they have lately. And while a recession or more trade turmoil is at least as dangerous for mid caps as for large companies, the category looks less risky in other ways.
For example, despite having more members, the S&P 500 is surprisingly top-heavy; 13 companies each make up at least 1% of the index. Only one company in the S&P 400 does. The mid-cap index also is less exposed to tech with about half of the S&P 500's industry weighting.
The flood of passive money into stock-index funds has partially bypassed mid caps, but there's a silver lining: When a company gets promoted to the S&P 500, it rallies on that news alone because traders anticipate forced buying by the 401(k) crowd. It's still in the S&P 400 when the gains occur, though.
On the other hand, when a company is demoted from the S&P 500 it typically slumps, but it's still in that index for several days. Then it enters the mid-cap index at a marked-down price.
In a market with too much dumb money, it's smart to ask what has been ignored.
This item is part of a Wall Street Journal live coverage event. The full stream can be found by searching P/WSJL (WSJ Live Coverage).
(END) Dow Jones Newswires
December 18, 2025 11:00 ET (16:00 GMT)
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