Market Shift: Mid-Cap Stocks Surpass Big Tech in 2024

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As earnings season comes to a close, a significant trend has emerged. Many mega-cap stocks have struggled in 2024, whereas mid-to-large cap stocks with strong retail engagement have shown impressive returns. This transition in market dynamics is noteworthy due to the substantial role mega-cap stocks play in major indices and exchange-traded funds (ETFs).

Improving market breadth characterizes 2024, with gains spread more uniformly across various sectors. This shift contrasts sharply with prior years, where the technology sector dominated market growth.

Throughout the year, most sectors have gradually increased, consolidating within a heightened upward trend. This has led to uneven trading patterns, with significant movements concentrated in mid to larger-cap stocks rather than the mega-cap stocks that previously defined market trajectories.

Challenges Faced by the Magnificent Seven

The performance of the so-called Magnificent Seven stocks, which include Apple, Microsoft, Amazon, Alphabet, NVIDIA, Tesla, and Meta Platforms, reveals a striking trend. Excluding Meta, the remaining stocks have demonstrated minimal YTD growth, remaining nearly flat.

Of this group, only Meta, Alphabet, and NVIDIA are in positive territory as of February 20th, while the others have entered negative performance levels. Tesla has seen the most significant decline, slipping nearly 12% since the close on February 20th. This underperformance marks a distinct turn from past years, where these stocks significantly boosted the overall market, providing substantial returns through broad-market ETFs.

In 2024, however, smaller market capitalization stocks are gaining traction, offering improved risk-adjusted returns and diminishing reliance on the Magnificent Seven.

Mid-Cap Stocks Shine with Strong Returns

As several mid-to-large cap stocks outperform this year, three examples particularly illustrate this trend:

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Dutch Bros Inc. BROS, a $12.7 billion consumer cyclical brand, has surged 56% YTD as of February 20th’s close.

The coffee chain’s growth began in November and was bolstered by its latest earnings report on February 12, which ignited a nearly 30% increase. The company reported a 75% year-over-year jump in Q4 earnings per share to $0.07, with sales growing 35% to $343 million.

Same-store sales increased by 4.4%, significantly outpacing the anticipated 1.5% increase.

This strong earnings outlook underscores a broader market trend: mid-cap companies are receiving greater rewards for earnings beats compared to mega-cap stocks, which have struggled to maintain post-earnings gains.

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Doximity Inc. DOCS, a $14 billion medical professional platform, achieved a 40% YTD increase.

Mirroring BROS, DOCS stocks were on a steady rise leading up to earnings and surged nearly 25% following its February 6 report. The company beat expectations significantly, reporting adjusted earnings per share of $0.45 versus the projected $0.34, along with revenue of $168.6 million compared to the anticipated $152.8 million.

Moreover, its fiscal Q4 revenue guidance of $132.5-$133.5 million surpassed analysts’ estimates of $123.8 million, further enhancing investor confidence.

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Robinhood Markets Inc. HOOD, although a larger entity valued at $49.7 billion, has also excelled, posting a 50% increase YTD.

The Stock has risen consistently since the beginning of the year. Following its February 12 earnings report, shares jumped from $55 to nearly $67 before retreating. The company reported a notable EPS beat, surpassing estimates by 141%, affirming the trend of mid-to-large cap stocks receiving favorable market reactions to earnings compared to their mega-cap peers.

The Potential for Capital Rotation in 2025

The robust YTD performances of BROS, DOCS, and HOOD indicate a new preference for risk and capital toward mid-to-large cap stocks rather than the traditionally dominant Magnificent Seven. Unlike past years, simply investing in leading tech-focused ETFs may not suffice for strong returns; some investors are now exploring better prospects in individual stocks.

As earnings season wraps up, the market’s positive response to these mid-cap players suggests a shift in investor sentiment. The recent underperformance of large-cap stocks may indicate that mega-cap stocks are approaching an upside limit, while select mid-to-large cap companies continue to demonstrate significant growth potential.

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The article “Market Shift: These 3 Stocks Are Winning While Big Tech Lags” first appeared on MarketBeat.