Mega-cap stocks have dominated headlines, with a handful of tech heavyweights driving the bulk of returns in recent years. Behind the scenes however, the picture is shifting, with small- and mid-cap (SMID) stocks experiencing a revival. The Russell 2500 Index — which tracks the performance of SMID-cap companies in the U.S. — has outpaced larger-cap benchmarks like the S&P 500 year to date.

This is chiefly a developed markets (DM) phenomenon. “SMID caps are up versus large caps in the U.S., flat in the U.K. and Australia, and down just 160 basis points in continental Europe — a far cry from the >25% underperformance witnessed between 2021–2023,” said Eduardo Lecubarri, global head of Small- & Mid-Cap Strategy at J.P. Morgan. “The opposite has happened in emerging markets (EM), where SMID caps held up between 2021–2023 but have underperformed year to date.” 

^{Source: MarketWatch. Figures as of September 16.}

^{Source: J.P. Morgan. These market cap ranges were first set in 1990 and are adjusted annually for U.S. inflation.} 

What are the risk factors to consider?

Ultimately, it’s important to note that the investment opportunity in SMID caps is relative to that offered by large caps. On an absolute return basis, there are several risk factors that warrant caution for investors in the short term.

For starters, the macro backdrop remains challenging: J.P. Morgan Global Research forecasts that interest rates will rise in the coming months, with the Federal Reserve hiking at its recent September meeting and the European Central Bank expected to follow suit in December. Plus, oil prices remain at around $100 per barrel, while a super El Niño could potentially add more downward pressure to growth and upward pressure to inflation through much of 2027.

In addition, there is no clear sector leader in the market at present:

• Tech: Tech stocks are already trading near highs despite mounting questions about the sustainability of the AI supercycle and its potential consequences (i.e. how AI might impact software companies, if AI capex can continue at its current pace and fears about AI’s impact on humanity).
• Financials: The sector has benefited from sticky inflation and a rising rates outlook, but valuations now look more demanding.
• Utilities, Staples and Telecom: These high-yield sectors — industry groups that consistently pay high cash dividends relative to their share price — could be vulnerable if rates move higher.  
• Energy and Materials: These sectors are generally considered too small in terms of weight to meaningfully carry the broader index.
• Industrials: Many names are trading at or near historic highs given their exposure to today’s super cycles, leaving the sector looking expensive.

All things considered, J.P. Morgan Global Research maintains a positive stance on SMID caps versus large caps, while advising caution in the short term as the year-to-date rally could prove choppy or eventually stall. With all this in mind, selectivity is key, with stocks that have achievable estimates, undemanding valuations and earnings visibility preferred in the U.S. and Europe. “Our relative views on SMID caps versus large caps have delivered alpha year to date, and we see little reason to change them at this juncture,” Lecubarri said.