### Mid-Cap Stocks Poised for Breakout Following Fed Rate Cuts

In light of the Federal Reserve's recent decision to reduce interest rates for the first time since 2020, investors are strategizing on the best investment options. Contrary to the recent headlines dominated by large and small-cap stocks, mid-cap stocks are now emerging as the most promising sector for significant gains.

Ryan Detrick from Carson Group highlighted the historical trend of mid-cap stocks outperforming once the Fed begins cutting rates. Detrick anticipates a 20% surge in small and mid-cap stocks over the next year, outpacing large-cap counterparts. The Russell 2000, representing small-cap stocks, has already risen by 10% since the end of June, surpassing the 4.7% rise seen in the S&P 500.

Goldman Sachs' analysis reinforces this outlook, showing that mid-caps typically excel in the year following the Federal Reserve's initial rate cut. As confidence in an economic soft landing grows, investors are increasingly comfortable exploring options beyond the largest companies. According to Jenny Ma from Goldman Sachs, the start of the rate-cutting cycle could boost equity demand and investor risk sentiment, with mid-cap performance depending on economic growth data and the rate of the Fed's easing cycle. Goldman Sachs projects a 13% return for the S&P 400 index over the coming 12 months.

Emily Roland, co-chief investment strategist at John Hancock Investment Management, described the current market rotation as sentiment-driven and based on hopes for a soft landing. Roland noted that mid-caps provide the best hedge in the near term. Jill Carey Hall from Bank of America also emphasized the strength of mid-caps, citing better guidance and revision trends and their ability to hedge against fewer-than-expected Fed cuts.

Investors have already factored in approximately 75 basis points of cuts by year’s end, with expectations for the policy rate to fall to 3.00%-3.25% by mid-2025, surpassing the Fed's projections. Wall Street's initial expectations for 2024 included around six interest rate cuts. The recent pivot from small-caps to mid-caps is driven by concerns over a slower rate-cutting cycle and ongoing recession fears, given the weaker balance sheets and profitability of small-cap stocks.

Annex Wealth Management’s chief economist, Brian Jacobsen, warns that the small-cap trade may face challenges before becoming more attractive, with slower growth concerns overshadowing the benefits of lower borrowing costs. Stuart Kaiser from Citi also advises caution, pointing out that fluctuating data could lead the market to react sharply to any signs of a hard landing, making small-caps particularly vulnerable.

While doubts linger regarding small-caps, Goldman's David Kostin suggests not to dismiss them entirely, as a positive jobs report could enhance investor appetite for risk. A favorable jobs print might encourage a shift from high-quality, expensive stocks to less favored, lower-quality firms due to perceived lower risks of significant labor market weakening.