As the Federal Reserve loosens its monetary policy, mid-cap equities are becoming increasingly attractive to investors, as reported by Wells Fargo Investment Institute on Tuesday. With the recent stock market pullback, the investment counselor has elevated their stance on US mid-cap equities from neutral to favorable.
This is particularly important as smaller companies have navigated one of the toughest operating climates in recent history, marked by a historical cycle of increasing interest rates and soaring inflation levels. Smaller companies, which are generally less equipped to manage costs than their larger counterparts, have demonstrated resilience during the turmoil, positioning themselves favorably now that interest rates are on a decline and the economy remains robust.
"The group leans more cyclically than large-cap equities, meaning it can be more sensitive to an acceleration in economic growth," Wells Fargo highlighted. Despite the upbeat outlook for mid-cap stocks, market sentiment has recently soured due to rising tariff uncertainties, with US benchmark equity indexes experiencing a decline on Monday.
Nonetheless, Wells Fargo noted that "the recent selloff has improved the risk-return balance for US mid-cap equities." In another development, Canada's Ontario province has announced a suspension of a planned 25% surcharge on electricity exports to specific US states, following discussions led by US Commerce Secretary Howard Lutnick.
Ontario Premier Doug Ford mentioned this renewed trade dialogue on Tuesday. Earlier that same day, US President Donald Trump announced his intent to double the proposed steel and aluminum tariffs on Canadian goods to 50%, reacting to Ontario's decision to impose tariffs on electricity exported to the US.
However, Wells Fargo expressed caution regarding small-cap equities, maintaining a neutral rating for this segment of the market, citing concerns over high leverage and a "poor" earnings history..