Inside Markets — Pro-Cyclical Mid Cap Bias

Strong seasonal fund flows, wide open buyback window and bullish post-election playbook suggest trend continuation across US equity markets into February. Today’s macro data mostly supports a pro-cyclical bias, while Matt Gaetz decision to withdraw from the AG nomination pulls the US political conversation back toward a pro-growth agenda.  Equity themes that emerged immediately after the election are leading again this morning after a ~2 week pause.  M&A candidates, companies with a higher domestic revenue mix and those with SMB revenue exposure are the preferred themes.

We look for the rally to broaden out into year-end and through January with the S&P Midcap 400 (MID) outperforming the SPX.  Midcap companies are usually more exposed to the aforementioned themes and the MID trades at a more reasonable ~16x forward EPS vs. the SPX at ~22x.  Broad equity participation also implies rotation away from crowded mega-cap names where concentration is greatest.  Note the top 10 stocks in the SPX make up ~36% of its market cap, which is an all-time record.

Midcap stocks in cyclical/value sectors with exposure to year-end/election themes puts you in regional banks, SMB software names and under-owned capital goods.