Smaller-cap equities have historically tended toward unpredictability, producing volatile return patterns during market dislocations. However, the blending of small- and mid-cap exposure can help improve diversification and return potential as market conditions evolve. For investors seeking small-cap participation with a more balanced risk profile, smid-cap stocks offer a thoughtful approach. Mid-cap stocks on their own present a strong case: They often pair the innovation and growth characteristics of smaller companies with more scale, balance sheet strength and resiliency found in larger firms.
One supporting factor for smid-cap stocks is the Federal Reserve’s move to cut interest rates last year. Even amid expectations for a reduced pace of cuts in 2026, current rates are more accommodative for non-mega-cap firms that are more sensitive to economic conditions. For now, the economic backdrop appears stable. Barring a drop in U.S. gross domestic product, smid-caps could fare better than in previous years.
Certain provisions in the One Big Beautiful Bill Act, including the restoration of 100% bonus depreciation and full expensing for research and development, could support a range of sectors, particularly industrials and financials. Combined with the continued push for U.S. reshoring and domestic manufacturing, there’s a constructive backdrop for more cyclical, capital-intensive areas of the market. U.S. mid-caps may be particularly well positioned given their direct exposure to the infrastructure buildout, where active equity selection is likely to be critical.
