FX168 Financial News (North America) News After interest rate cuts, one sector of the stock market is likely to achieve excessive growth: mid-cap stocks.

Goldman Sachs analysts said that historically, mid-cap stocks have generally grown more strongly than large and small-cap stocks within a year after interest rate cuts.

Analysts wrote in a report on Tuesday (9/10): “Since 1984, the S&P 400 mid-cap index has generally performed better than the S&P 500 index and the Russell 2000 index in the 3 and 12 months after the Federal Reserve first cut interest rates.”

They forecast a return of 13% for mid-cap stocks next year, mainly due to lower initial valuations and a healthy growth environment.

“Historically, lower initial valuations have been an important predictor of future returns for midcap stocks, especially at extreme levels, unless the US economy falls into recession,” the analyst said.

They added that compared to large-cap stocks, mid-cap stocks provide “growth and quality achieved at discounted prices,” and the current trading price of large-cap stocks is slightly lower than the historical highs set during the tech bubble and post-pandemic frenzy.

Analysts said it is widely predicted that mid-cap earnings will grow at an annual rate of 11% over the next two years, while the S&P 500 has an annual earnings growth rate of 7%.

Mid-cap stocks also have better balance sheets and profitability than small-cap stocks, analysts say.

“Small-cap stocks are even more sensitive to the economy than mid-cap stocks,” the analyst said. The 10-year interest rate is close to 4%, and the risk that economic growth concerns will resurface, mean it may be difficult for small-cap stocks to continue to excel.”

Goldman Sachs analysts said that their expectations for strong midcap performance are largely dependent on strong and accelerated economic growth, which will generate the strongest monthly returns for mid-cap stocks.

“As long as the US economy expands, the S&P 400 usually produces positive returns. When the economy is expanding and accelerating (+2%), mid-cap stocks have the highest monthly return, but when the economy slows down (+1%), the return remains steady, which is Goldman Sachs's benchmark forecast,” the analyst said.

They pointed out that after the unexpected rise in the unemployment rate in July, labor data weakened further, which may pose a downside risk to mid-cap stocks, as the industrial and financial sectors account for a large share of the index.

Analysts said that these risks “should be buffered by lower valuations compared to large-cap stocks and stronger fundamentals compared to small-cap stocks,” and that the possibility of a recession next year is very small.

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

This forecast is slightly more conservative than generally expected. Investors expect interest rates to be cut by 25 basis points in September, and to cut interest rates by 100 to 125 basis points by the end of the year.

Analysts said, “In the short term, the performance of midcap stocks versus large and small caps will depend on the strength of economic growth data and the trajectory of the Federal Reserve's easing cycle.”