Sitara Sundar

Equity Specialist


Mega-cap tech stocks – the market’s darlings – continue to power forward. They have accounted for a staggering 60% of the S&P 500’s 40.5% return since the beginning of 2023.1

Now, as earnings growth accelerates in a robust U.S. economy, the stock market rally is broadening beyond mega-cap tech. And it is shining a particular light on U.S. small- and mid- cap (SMID-cap) stocks. This market cohort offers the potential for long-term capital appreciation supported by durable profit growth. What’s more, given the concentrated market rally since the start of last year and renewed concerns around rates remaining higher for longer, these stocks now trade at a near-record valuation discount. 

But investors will need to be discerning. We prefer quality SMID-cap stocks that focus on profitability and growing competitive advantages. Some SMID-cap companies carry high levels of debt and a valuation discount for these stocks seems reasonable. However, today’s near-record discount in the highest-quality SMID-cap stocks does not. Indeed, high-quality smaller-cap stocks now trade at a near-record valuation discount versus their large-cap peers, despite having similar cash flows and profit margins. We believe that gap will narrow, creating a potential entry point. 

A near-record discount in smaller-cap stocks may offer an opening


Highest quintile of free cash flow margins, Forward P/E ratio relative to the same cohort in Large-Cap Stocks

Line chart showing highest quintile of free cash flow margins, forward P/E ratio relative to the same cohort in large-cap stocks.


Source: Empirical Research Partners Analysis. Data as of April 30, 2024. *Note: Capitalization-weighted data, Small-capitalization Stocks (ex-Commodities & Biotech).

Durable earnings growth, strong long-term capital appreciation

U.S. SMID-cap stocks have generally underperformed U.S. large-cap stocks over the past 10 years. That dynamic partly reflects the dominance of mega-cap tech stocks. But here’s a fact that many investors miss: Over the past 10 years, SMID-cap companies have generally grown their earnings at a faster pace than their large-cap peers. Indeed, a vast majority of returns in SMID-cap stocks have been driven by earnings growth (versus multiple expansion). 

Smaller cap companies have underperformed but outgrown their large cap peers

Bar chart showing small- and mid-cap companies' annualized earnings growth and returns over the past 10 years vs large cap.


Source: JP Morgan Private Bank, FactSet. January 2024.

What explains that earnings growth differential? First, many SMID-cap companies are at the leading edge of innovation. That might involve developing breakthrough software or advances in industrial automation. Second, leading SMID-cap companies have streamlined business models with embedded competitive advantages in order to build – and sustain –leadership in fragmented markets. They’re the proverbial “big fish in a small pond.”

Not surprisingly, a combination of innovation and market dominance makes SMID-cap companies ideal targets for M&A activity. Over the past 30 years, 96% of public M&A targets in the United States have been SMID-cap firms. Last year, the average premium that large-cap companies paid to acquire SMID-cap companies reached 50%, a post–global financial crisis high.2

We believe SMID-cap companies will continue to deliver strong earnings growth. Our 2024 Long-Term Capital Market Assumptions estimate that U.S. SMID-cap equity returns will be robust over a 10-to-15-year investment horizon, even rivalling that of U.S. large caps (albeit with more risk). We believe building a portfolio of actively managed, attractively valued, high-quality SMID-cap companies can generate robust long-term returns while mitigating some of the risk.

Small/Mid-cap equities expected to generate robust returns


Annualized return expectations

Bar chart showing small- and mid-cap companies' estimated long-term returns vs large cap.


Source: 2024 Long-Term Capital Market Assumptions (LTCMAs), expectations for risks and returns over a 10- to 15-year time frame. J.P. Morgan Asset Management’s LTCMAs are the product of a deep, proprietary research process that pools the quantitative and qualitative insights of more than 60 investment professionals.

An inefficient market ripe for stock picking

While we believe in the structural case for investing in SMID-cap stocks, selectivity is key. We note a wide dispersion in the quality of the underlying companies in the SMID-cap universe, which partly reflects the state of disruption in their businesses. Some companies either carry high levels of debt or do not generate earnings (U.S. small-cap companies dedicate over 30% of their Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to servicing debt, more than three times their large-cap peers).3 Given investor concerns about rates staying higher for longer, the level and durability of earnings will become increasingly important.

Limited analyst coverage of SMID-cap stocks provides ample opportunity for active stock picking. Over 90% of SMID-cap stocks have minimal analyst coverage versus around 25% for large caps.

An inefficient market: >90% of small/mid cap stocks have minimal analyst coverage


Percent of universe

Bar chart showing analyst coverage in US large cap vs US small- and mid-cap stocks.

Source: "The US SMid Outlook - 2024", JP Morgan Global Market Strategy. January 2024.

Over the long run, investing in high-quality SMID-cap stocks—those with strong balance sheets, exceptional returns on equity, and durable and growing competitive advantages – has historically generated better long-term performance with less volatility than investing in the broad market alone. We believe that trend will persist, making it imperative to identify true high-quality companies. By definition, an index fund may not be able to make those distinctions. In the SMID-cap space, we believe, active management is critical

What this means for your portfolio

Especially after the past several years of mega-cap stock gains, you may have a greater percentage of your equity portfolio invested in large-cap stocks. Quality SMID-cap stocks offer not only the prospect for long-term growth, but also the potential portfolio diversification benefits from investing across the market-cap spectrum. And as we’ve noted, discounted valuations make for a potential entry point. 

How much might you consider allocating to SMID-cap stocks? We believe that allocating around 5% to 10% of an overall equity portfolio to SMID-cap stocks, assuming an appropriate time horizon and risk tolerance, can be additive to risk-adjusted returns. In other words, a small shift can make a meaningful difference.

We can help

Your J.P. Morgan advisor can advise how SMID-cap stocks might fit into your equity portfolio and support your family’s long-term financial goals.



The largest mega-cap stocks include Nvidia, Microsoft, Apple, Amazon, Meta, Alphabet, Tesla. Past performance is no guarantee of future resultsIt is not possible to invest directly in an index. Source: Bloomberg Finance LP. Data as of May 31, 2024.


“U.S. Small/Mid-Cap Strategy: The U.S. SMID Outlook—2024,” J.P. Morgan Global Market Strategy, January 2024. 


“J.P. Morgan Wealth Management Mid-Year Outlook: A strong economy in a fragile world,” June 2024.

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