Finding the Sweet Spot
Large caps tend to command the spotlight given the strong performance from technology stocks tied to artificial intelligence (AI). However, we believe investors may be overlooking compelling opportunities within mid-caps.
When investors think about U.S. equities, large caps tend to command the spotlight given the strong performance from technology stocks tied to artificial intelligence (AI). However, we believe investors may be overlooking compelling opportunities within mid-caps.
- Over the past ten years, active managers of U.S. mid-cap equities have generated a median annualized alpha of 0.92%, considerably higher than the 0.19% produced by their large-cap counterparts (see Figure 1). We believe this higher alpha generation is driven in part by a less efficient mid-cap market, where active managers may benefit from a wider opportunity set to uncover mispriced securities and greater access to company management teams for deeper due diligence.
- This inefficiency may be driven in part by relatively low sell-side coverage: the average mid-cap stock is followed by about half as many analysts as the average large-cap (see Figure 2). We believe that with less coverage of mid-caps, dislocations between price and fundamentals are more likely to develop, potentially giving skilled active managers an informational edge—and the potential for meaningful upside when catalysts such as positive earnings surprises or M&A activity bring broader market attention.
- Over the past 25 years, the S&P MidCap 400 Index has traded at a 3% discount to the S&P 500 Index on a price-to-earnings (P/E) basis. However, as of June 2026, mid-cap stocks are trading at a 12% discount to large-cap stocks (see Figure 3).
- Large-cap stocks have benefited from AI enthusiasm over the past few years, but mid-caps are projected to deliver stronger free cash flow growth going forward (see Figure 4). The AI buildout requires significant capital spending on infrastructure, including power, cooling, networking, and electrical equipment. Many mid-cap companies sit in these parts of the value chain, meaning they may benefit directly as large technology companies continue investing to meet rising AI demand.
The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of July 2026. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.
Risk Disclosures: Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Investing in companies of medium capitalizations involves the risk that such issuers may have limited product lines or financial resources, lack management depth, or have limited liquidity. Past performance is not indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments. Companies involved in, or exposed to, AI-related businesses may have limited product lines, markets, financial resources or personnel as they face intense competition and potentially rapid product obsolescence, and many depend significantly on retaining and growing their consumer base. These companies may be substantially exposed to the market and business risks of other industries or sectors, and may be adversely affected by negative developments impacting those companies, industries or sectors, as well as by loss or impairment of intellectual property rights or misappropriation of their technology. Companies that utilize AI could face reputational harm, competitive harm, and legal liability, and/or an adverse effect on business operations as content, analyses, or recommendations that AI applications produce may be deficient, inaccurate, biased, misleading or incomplete, may lead to errors, and may be used in negligent or criminal ways. AI technology could face increasing regulatory scrutiny in the future, which may limit the development of this technology and impede the future growth. AI companies, especially smaller companies, tend to be more volatile than companies that do not rely heavily on technology.
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S&P 500® Index: An index of large company stocks considered to be representative of the U.S. stock market. S&P MidCap 400 Index is an unmanaged index considered representative of mid-sized US companies. The S&P indexes are a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Fred Alger Management, LLC and its affiliates. Copyright 2026 S&P Dow Jones Indices LLC, a subsidiary of S&P Global Inc. and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. Investors cannot invest directly in any index. The performance data quoted represents past performance, which is not an indication or a guarantee of future results.
Alpha measures the difference between a portfolio’s actual returns and its expected performance, given its level of risk (as measured by beta). Beta measures a portfolio’s sensitivity to market movements relative to a particular index; a portfolio with a beta of 1.00 would be expected to have returns equal to such index.
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Price-to-earnings is the ratio for valuing a company that measures its current share price relative to its earnings per share.
Free cash flow represents the amount of cash a company generates after operating expenses and capital expenditures, divided by its shares outstanding.
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