Mid-cap stocks are the goldilocks segment of the U.S. equity market – not too small or too big. They’re just the right size to potentially provide long-term profitability with returns that can outpace broader markets.
“We think mid-cap is the sweet spot,” says Shanthu David, senior portfolio manager, North American equities at RBC Global Asset Management.
In recent years, the performance of U.S. mid-caps has trailed that of the S&P 500 index, which has been driven by the ‘Magnificent Seven’1 large-cap technology stocks. Yet, over the past 30 years (ended September, 2025), the total return of the S&P Mid-Cap 400 Index is up 2,307% versus 1,960% for the S&P 500 Index.
Canadian equity investors are often underexposed to U.S. mid-cap companies in their portfolios, often focusing more on large or ‘mega’ cap stocks.
The drawbacks of large-cap strategies
A large-cap strategy has its drawbacks, namely technology stock concentration. As companies such as Meta Platforms Inc. and Alphabet Inc have transitioned into more capital-intensive and cyclical business, it will be difficult for them to continue the exceptional growth they’ve experienced over the past few years, says David Tron, senior portfolio manager with RBC Global Asset Management, who co-manages RBC U.S. Mid-Cap Growth Equity Fund with Mr. David. Consequently, while they remain solid companies, their earnings growth is increasingly in line with the broader S&P 500 Index. “As a result, we believe there is more opportunity in the mid-cap growth space, as you have access to companies that can demonstrate stronger earnings growth potential often at lower valuations,” Mr. Tron says.
“A key worry with these mega-cap stocks is that recent growth has exploded. Valuations have gotten so high that accelerated earnings growth will be tough to come by over the next decade,” Mr. Tron says. “In contrast, good mid-caps are much earlier in the company life cycle, so we can see a path to higher earnings growth.”
Why mid-caps offer strong growth potential
Even though they’re vulnerable to the same macroeconomic risks, a trade war included, U.S. mid-caps are also less reliant on global markets.
“Part of what insulates these companies is their large U.S. domestic exposure,” Mr. Tron says.
These companies aren’t small either, at least not by Canadian equity standards. For example, the companies held in RBC U.S. Mid-Cap Growth Equity Fund have market capitalizations ranging from US$5-billion to US$55-billion.
“In the Canadian context, on the lower end, that’s similar to the market cap of Canadian Tire Corp. Ltd., and on the higher end that’s similar to the market cap of Manulife Financial Corp.,” Mr. David says.
The mid-cap universe is also highly diverse. The benchmark for RBC U.S. Mid-Cap Growth Equity Fund is the Russell Midcap Growth Index, which includes 800 companies across various sectors, including technology, consumer discretionary, utilities and industrials.
Active management can often be advantageous when looking at a mid-cap strategy. Some larger stocks in the index have share prices far outstripping revenue and earnings, while others have exposure to higher-volatility and likely unsustainable growth strategies.
Mr. David and Mr. Tron employ a growth at a reasonable price approach to uncover fairly priced firms with competitive advantages, good management and strong topline growth.
“We’re always looking for that kind of revenue growth accompanied by future free cash flow growth.”
Although mid-cap companies may face headwinds in the near term, the recent past reveals equities with strong fundamentals often outperform. The experience of the COVID-19 pandemic is a recent case study, Mr. David says. Mid-caps that were market leaders often came out the other side stronger.
“We’re very comfortable believing mid-cap companies in our portfolio will come out stronger on the other side of current challenges.”
Furthermore, the recent market dislocations provide an opportunity to buy great companies at share prices below their intrinsic values. “We like to turn volatility into opportunity,” Mr. Tron says.
The role of active management in mid-cap strategies
Active managers can also sift through hundreds of companies to find the few with strong, sustainable growth that could grow even bigger through mergers and acquisitions. What’s more, mergers and acquisitions can happen during turmoil, as lesser competitors become vulnerable.
“We like that quality, no matter the market cycle,” Mr. David adds.
More broadly, a U.S. mid-cap growth strategy is worth considering, especially when the decade ahead is unlikely to see a repeat of mega-cap dominance, he adds.
“We believe there is a lot of opportunity ahead.”