No Longer Stuck in the Middle?

February 19, 2025 | Catherine Hillier, Senior Research Analyst

By now, readers likely know that large-cap equities propelled the U.S. equity market higher in 2023 and 2024, as the S&P 500 Index advanced over 20% in each of those years. Although positive performance continued for U.S. stocks to begin 2025, the often-overlooked mid-cap space ultimately led the way, with the Russell Midcap Index gaining 4.3% in January. This figure was higher than both the 3.2% and 2.6% returns notched by the Russell 1000 Index and Russell 2000 Index, respectively, during the month. Commonly underrepresented in investor portfolios, mid-cap indices provide exposure to more established business models than small-cap benchmarks but also offer potential exposure to companies growing at a faster rate than those within the large-cap universe.

As it relates to recent performance drivers, mid-cap equities were buoyed by the January CPI print, which led to a broadening out of markets. The space also benefited on a relative basis as mega-cap technology stalwarts sold off due to rhetoric surrounding trade restrictions and AI competition from China. While market concentration issues related to these mega-cap companies are a belabored topic, the theme of concentration is not isolated to the large-cap space. To that point, just two companies in the Russell Midcap Growth Index (Palantir and AppLovin) accounted for nearly 30% of the return of that benchmark last year. As of the end of last month, these two companies comprise more than 8% of the index and, with market capitalizations above $100 billion, are now outside of the typical range used to delineate the mid-cap space. Since these and similar dynamics have plagued indices across the equity spectrum, Russell will implement a second rebalance in November based on market capitalization beginning next year. This rebalance will help ensure the Russell indices provide an accurate representation of their respective asset classes and have the potential to combat historic levels of concentration. As index construction evolves, it is prudent for investors to construct diversified equity portfolios to balance the risks and rewards of each asset class.

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