Big Tech Has Risen Too Much... Wall Street Urges Focus on Mid-Cap Stocks

Big Tech Running Nonstop Leads S&P 500 Gains This Year
Rally Expected to Spread to Mid-Caps if Interest Rate Cuts Become Visible

Ahead of the U.S. Federal Reserve's interest rate cut, an analysis suggests that mid-cap stocks could begin to stand out significantly from the second half of the year. Some believe that mid-cap stocks may be more attractive than big tech stocks, which have overheated due to excessive interest in artificial intelligence (AI).

[Image source=Reuters Yonhap News]

On the 6th (local time), according to Bloomberg and others, Citibank recently stated, "The U.S. stock market is expected to remain strong in the second half of the year," adding that "the rally could extend from large-cap to mid-cap stocks." This is based on the expectation that mid-cap profitability will improve thanks to the Fed's rate cuts and robust economic growth.

So far this year, the S&P 500 index has risen about 12%, but most of the gains have been driven by big tech. The top four stocks?Nvidia, Microsoft (MS), Meta Platforms, and Amazon.com?accounted for 56% of the total corporate returns in the S&P 500 this year.

In contrast, the S&P 500 Equal Weight index rose by only about 4%. This index assigns equal weight to its components, indicating that mid- and small-cap stocks have benefited less from the AI-driven rally in the U.S. stock market compared to big tech.

As big tech has surged relentlessly, there is growing speculation that a correction is inevitable. In this context, Wall Street, including Citigroup, suggests using mid-cap stocks as a hedge strategy.

Citigroup highlights mid-cap stocks related to AI, specifically naming sectors such as power, robotics, drug discovery, cybersecurity, and medical devices. Exchange-traded funds (ETFs) that allow indirect investment in mid-cap stocks include the iShares Russell Mid-Cap ETF (IWR) and Vanguard Mid-Cap ETF (VO). Recently, the Touchstone Mid-Cap Fund (TMAPX) has also gained attention.

Expectations that the U.S. could cut rates as early as September are further fueling optimism about mid-cap stocks. Typically, rate cuts make it relatively easier for mid-sized companies to raise and refinance capital. This was why mid-cap stocks were the biggest beneficiaries of the "everything rally" during November-December last year, when expectations of a Fed pivot (direction change) were spreading.

MarketWatch reported, "Investing in mid-cap dividend stocks in line with rate cuts is worth considering." During periods of prolonged high interest rates, safe assets like short-term U.S. Treasury bonds could yield around 5%, making mid-cap dividend stocks, which tend to have higher price volatility, less attractive. However, if rate cuts become visible, the S&P 400 Dividend Aristocrats index is expected to perform well. The outlet recommended 24 dividend stocks, including Microchip Technology, Williams-Sonoma, Lowe's, Carlyle, Westlake, and Best Buy, based on criteria such as average dividend growth over the past five years.

The Wall Street Journal (WSJ) noted, "Investors are preparing to buy companies that have shown relative weakness in the market," and advised, "It is necessary to select and invest in companies with strong fundamentals."

This content was produced with the assistance of AI translation services.