The middle market is the heart of the U.S. economy. But publicly traded SMID-cap stocks have underperformed thanks to weak fundamentals. We explore why public markets are a poor mirror for the strong middle market, and how investors can use alternatives to gain access.
Finding diversification has become more challenging
Investing in 2024 has become an exercise in managing the gravitational pull of the Magnificent Seven, an inescapable group of seven massive U.S. tech and tech-related firms. We have discussed the weighting of these stocks in the S&P 500 eclipsing 30%, but as the chart on the left shows, their contribution to index risk is meaningfully higher. If we include the next three largest contributors—Broadcom, J.P. Morgan and Berkshire Hathaway—the top 10 stocks represent nearly half the risk of the S&P 500.
Most of these stocks have benefitted from the secular trends of the past two decades. Technological innovations have birthed massive new markets, and globalization has created a winner-take-most environment within these industries. Today, value from the furious buildout of artificial intelligence appears to be accruing to the same players. With these stocks so dominant but also exposed to many of the same secular global trends, questions have arisen around how to augment them in the growth portion of a portfolio.
In our view, investors should look close to home—the U.S. economy remains strong, but the S&P 500 is decreasingly exposed to domestic outcomes. As we will explore in this chartbook, midsize U.S. firms look like an attractive way to obtain this exposure—but the ideal access point has changed.