Source: Jin10 Data
Author: Wu Yu.

According to Goldman Sachs, one area of the US stock market that may experience rapid growth after the Fed rate cut is middle cap stocks, i.e. stocks with market caps between small caps and large caps.

Goldman Sachs analysts stated that, compared to large cap and small cap stocks, middle cap stocks historically show stronger growth within a year after a Fed rate cut.

In a report on Tuesday, analysts wrote, "Since 1984, the S&P 400 middle cap index has typically outperformed the S&P 500 index and the Russell 2000 index in the 3 and 12 months after the first Fed rate cut."

They predict a 13% ROI for middle cap stocks next year, mainly due to lower initial valuations and a healthy growth environment.

The analysts stated, "Historically, lower initial valuations have been an important indicator for predicting the future returns of middle cap stocks, especially at extreme levels, unless the US economy falls into a recession."

They added that compared to large cap stocks, middle cap stocks "offer growth and quality at a discount", while the trading price for large cap stocks is currently slightly below the historical highs set during the technology bubble and the prosperity period following the COVID-19 pandemic.

The analysts stated that the market generally forecasts an average annual growth rate of 11% for middle cap stocks over the next two years, while the annual growth rate for the S&P 500 index is 7%.

On the other hand, compared with small-cap stocks, mid-cap stocks have better balance sheets and profitability. "Small-cap stocks are even more sensitive to the economy than mid-cap stocks," analysts say, and add, "The risk of the 10-year US Treasury yield approaching 4% and concerns about a return of growth worries suggest that small-cap stocks may struggle to outperform large-cap stocks continuously."

Goldman Sachs analysts say that their expectations for the performance of mid-cap stocks largely depend on strong and accelerating economic growth, which would result in the strongest monthly returns for mid-cap stocks.

Analysts say, "As long as the US economy is expanding, the S&P 400 index usually generates positive returns. When the economy is expanding and accelerating (+2%), the median monthly return for mid-cap stocks is the strongest, but when expansion slows down (+1%, which is Goldman Sachs' baseline forecast), the median monthly return for mid-cap stocks remains steady."

They point out that further weak labor data, following the unexpected rise in the US unemployment rate in July, could bring downside risks to mid-cap stocks, as the industrial and financial sectors have a significant weight in the index.

However, analysts say that these risks "should be buffered by the relatively lower valuation of mid-cap stocks compared to large-cap stocks, as well as their strong fundamentals compared to small-cap stocks," and the possibility of an economic recession next year is low.

Goldman Sachs expects the Federal Reserve to cut interest rates by 25 basis points at next week's policy meeting, followed by 25 basis point cuts in November and December.

This forecast is slightly more conservative than the market's general consensus. Investors expect the Fed to cut rates by 25 basis points in September and a total of 100 basis points by the end of this year.

Analysts say, "In the short term, the performance of mid-cap stocks relative to large-cap stocks and small-cap stocks will depend on the strength of economic growth data and the trajectory of the Fed's easing cycle."

Editor/Jeffy