July 8, 2026

A growing consensus among market strategists and chief investment officers is to look beyond the highly concentrated, technology-heavy large cap market and position for a broadening market in 2026. A shift down the cap spectrum to mid cap stocks can be a compelling proposition for investors for three reasons:

Mid Caps: The Market’s “Sweet Spot”

Mid cap companies typically range from US$500 million to US$70 billion in market capitalization. They sit in a distinctive phase of development: more established and profitable than small caps, yet still early enough in their expansion to offer meaningful growth potential relative to large caps. Their business models often feature diversified revenue streams and access to capital, giving them the flexibility to adapt to changing economic conditions. This balance of operational maturity and runway for expansion makes mid caps a compelling part of the market.

Valuation Gap Despite Comparable Earnings Growth

As the market cap-weighted S&P 500 has returned a staggering 25% annualized over the past three years (over 3x its 25-year average), its concentration risk has also ballooned. Roughly 40% of the index is in just 10 stocks. Eight of those 10 are technology-related and tied to AI in one way or another. The average price/earnings (P/E) multiple of the top ten is more than double that of the average mid cap stock. Rebalancing across sectors and market cap ranges isn’t just diversification; it’s a way to capture a broader market if leadership rotates and to help protect portfolios should mega-cap price momentum hit a speed bump.

That’s where the earnings growth story matters. Mid cap companies have delivered earnings growth that has nearly matched large cap peers (Exhibit 1), yet their stocks have not been rewarded in price (Exhibit 2). In contrast, small cap earnings have struggled, which helps explain their valuation gap.

The result is one of the widest valuation discounts for mid caps relative to large caps in this cycle (see Exhibit 3). If you believe in mean reversion, a valuation catch-up could support relative outperformance, especially with earnings strength as the anchor. Resilient fundamentals paired with discounted multiples create a setup where mid caps don’t need a speculative, risk-on backdrop to work.

Source: Factset, 12/31/2025

Policy Tailwinds

The U.S. Federal Reserve’s (Fed’s) rate-cut campaign of late 2025 is expected to be a driving force for risk assets in 2026. Lower borrowing costs should encourage companies across industries to finance projects with less uncertainty than in 2025. And because the rationale for the cuts is to normalize policy rather than to thwart an imminent recession, the stable economic backdrop should offer a degree of buoyancy to business activity.

On the fiscal policy side, key provisions in the U.S. One Big Beautiful Bill Act seem to have been written with small- and mid-sized companies in mind:

These policy tailwinds are expected to drive a reacceleration in business activity across many sectors that have failed to keep up with technology over the past few years. However, with elevated inflation and subsequent pricing pressures still intact, we continue to stress the importance of higher-quality and resilient businesses, even in a favorable policy environment.

AI Buildout Beyond the Headlines

AI models and hyperscalers have dominated headlines over the past year. As discussed earlier, that attention has been reflected in the earnings, stock prices, and growth of mega caps. Mid caps offer another way to play the AI buildout without chasing the mega cap momentum. The AI boom depends on physical infrastructure, including power, cooling, and networking. According to S&P Global, roughly 80% of the growth in private domestic demand in the first half of 2025 came from data-center and high-tech investment. That spending cycle is still in its early phases, with massive capex commitments planned for data center construction, grid interconnection, transmission upgrades, and automation. The more capacity that is built, the greater the recurring demand for equipment, tools, and ongoing services.

A large portion of the AI “picks-and-shovels” ecosystem sits in the mid cap universe. Think industrial suppliers, automation specialists, thermal-cooling vendors, electrical device manufacturers, and networking and interconnect providers. Many of these businesses are well-established, high-quality operators with long-standing competitive moats in a variety of end markets—now positioned to benefit from one of the largest infrastructure cycles in decades.

Cyclicality of Returns

Periods of narrow market leadership are not new. In the late 1990s, mid caps significantly underperformed large caps in the years leading up to the tech bubble’s peak, only to emerge as sustained outperformers for much of the following decade. While the drivers of today’s market environment are different, the recent performance pattern feels familiar. With earnings strength, attractive valuations, and supportive policy tailwinds, mid caps appear well-positioned should leadership broaden.

Source: Morningstar, Madison Investments, 12/31/2025

The Mid Cap Opportunity

Taken together, these dynamics point to an opportunity in an overlooked part of the market. Mid caps pair large-cap like earnings strength with a valuation discount and are poised to benefit from both supportive policy and the ongoing infrastructure buildout tied to AI, though mid cap investing involves greater volatility and less established business profiles compared to larger companies. For investors looking to reduce concentration risk and participate in a more balanced equity market, we believe the mid cap segment stands out as a logical destination.

Important disclosures:

Source: Madison Asset Management, LLC, unless otherwise stated.

Data as of 12/31/2025.

Madison Investments is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC and Madison Investment Advisors, LLC.

Index returns are shown for informational purposes only. Indexes are unmanaged and their returns include reinvestment of dividends, if applicable, but do not include any sales charges or fees as such costs would lower performance. It is not possible to invest directly in an index.

The information contained herein has been provided by Madison Investments (Canada) Ltd. and is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk profile.

Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and sim forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.

Investments in midsize companies may entail greater risks than investments in larger, more established companies. Midsize companies tend to have narrower product lines, fewer financial resources, and a more limited trading market for their securities, as compared to larger companies. They may also experience greater price volatility than securities of larger capitalization companies because growth prospects for these companies may be less certain and the market for such securities may be smaller. Some midsize companies may not have established financial histories; may have limited product lines, markets, or financial resources; may depend on a few key personnel for management; and may be susceptible to losses and risks of bankruptcy.

Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.

S&P 500 Index: large cap market index that measures the performance of a representative sample of 500 leading companies in leading industries in the U.S.

Russell 2000 Index: measures the performance of the 2,000 smallest companies in the Russell 3000® Index.

Russell Midcap Index: mid cap market index that measures the performance of the mid cap segment of the U.S. equity universe.

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

Price-to-Earnings (P/E) Ratio: measures how expensive a stock is. It is calculated by the weighted average of a stock’s current price divided by the company’s earnings per share of stock in a portfolio.