Mid-caps: sweet spot or road to nowhere?

By James Yardley on 13 October 2026 in Equities

Mid-caps used to be considered the sweet spot for investors. Small enough to be agile, yet large enough to be robust, many fund managers would zero in on mid-caps as a source of reliable growth. That sheen has faded in recent years, as bigger has been better, reinforced by passive investment and the performance of the US technology giants. However, there has been the hint of a revival for mid-caps in recent months.

UK mid-caps have been the clearest example of how medium-sized companies have fared. Excluding investment companies, the FTSE 250 has risen just 27% over the past five years*. That compares to a return of 78.7% for the FTSE 100*. UK mid-caps have perhaps been the most conspicuous victim of the outflows from the UK market by domestic investors.

However, it hasn’t just been a UK phenomenon. US mid-caps have also shown real weakness. Over five years, the return of the MSCI USA Mid Cap index, in sterling terms, is 38.7%. That compares to 90.3% for the MSCI USA*. European mid-caps haven’t shown the same degree of weakness, but have still lagged their large-cap peers.

Why have mid-caps fallen behind?

There are various potential reasons for this. Mid-cap indices have generally had lower weightings in technology at a time when technology has investors’ priority. They are seen as more domestically-focused at a time when the UK and European economies have been weak. Perhaps most importantly, they have been sidelined by the focus on passive investment, which has naturally favoured larger companies.

Are the fortunes of mid-caps starting to turn?

There is a question over whether this ‘winner takes all’ dynamic will change. For the time being, it has only been accelerated by the AI trade, which has favoured scale and crowded out smaller players. That said, there are some signs that some mid-caps are reviving. Recent performance has been more encouraging.

Some active managers have done better still: the VT Tyndall Unconstrained UK Income fund, which currently has around 77% invested in mid-caps, returned 13.24% over the same period***.

European mid-caps are up 8.4% for the year to date, also outpacing their large-cap equivalents, as measured by the MSCI Europe ex UK Mid Cap index**, albeit by a much smaller margin. US mid-caps are the only area that hasn’t seen the same strength. They are up just 11.6% for the year to date, compared with 16.7% for the large-cap index**.

What’s driving the UK revival?

Part of the difference may be merger and acquisition activity. UK mid-cap companies have been a fertile hunting ground for international corporate and private equity buyers looking for high-quality companies at low prices.

In recent history, there has been a £2.7 billion bid for Tate & Lyle, a £4.3 billion takeover approach for Easyjet, a £1.3 billion offer for Senior, £1 billion bid for Gamma Communications and a £1 billion bid for Spire Healthcare, plus various bids for property and clean energy assets. These bids have tended to come at a significant premium to the prevailing market price for the shares.

Another factor may have been the relative political stability in the UK. The pre-Budget period is typically a precarious moment for small and mid-caps, which are typically seen as more domestic in focus. However, this year has been different. Simon Murphy, manager of the VT Tyndall Unconstrained UK Income fund, says: “Thus far, while there has been a certain degree of speculation, it has been significantly less than ahead of more recent budgets, and what policy announcements have come have been relatively well received, such as the ‘Your First Home’ initiative.”

The UK has also had some moderately good news on its economy. It has grown faster than was expected at the start of the year. Consumers finally appear to have the confidence to spend, even as inflationary pressures have risen. The employment market has been generally stable, which has helped sentiment around UK mid-caps. Simon Murphy believes it can continue, particularly if there is any progress on the Strait of Hormuz.

In the US, the picture is more mixed. The valuation differential is not as acute, and the M&A activity not as lively. The wave of mega-IPOs, including SpaceX, Anthropic and OpenAI, may crowd out other options. Nevertheless, Robert Kaynor, manager of the Schroder US Mid-Cap fund, says the underlying macroeconomic and fundamental backdrop should be supportive for the sector, with resilient economic growth and real GDP growth potentially exceeding 2.5%: “This level of growth has historically favoured smaller companies given their greater domestic sensitivity and operating leverage.” He is seeing this coming through in stronger earnings expectations for mid-cap companies.

Can the recovery continue?

Across the world, mid-caps have valuation on their side. This is particularly true in the UK and Europe. In the UK, the dividend yield on the FTSE 250 remains above that of the FTSE 100, a rare phenomenon in history. That should give them some capacity to absorb market shocks. Equally, with a relatively low technology weighting, mid-caps may be in a better place to absorb any fall-out from AI weakness if it happens.

Rising bond yields and domestic political upheaval could continue to weigh on mid-caps around the world, but they are likely to be supported by resilient economic growth across the UK and US, by M&A activity and by undemanding valuations. Equally, while mid-caps may not be the sweet spot for growth they once were, there are still some advantages to being nimble in a fast-moving world.

*Source: FE Analytics, total returns in pounds sterling, 12 October 2021 to 12 October 2026

**Source: FE Analytics, total returns in pounds sterling, 31 December 2025 to 12 October 2026

***Source: Tyndall, Q3 2026 review