Note

Sizing up the SMIDs: Supports build in choppy equity market

While today’s challenging environment has taken its toll on stocks, economic trends could lend support for beaten down SMID stocks.

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September 7, 2022

The two-month rally in stocks that began in mid-June undid a significant portion of the valuation decline seen in equities this year. It also has forced investors to search for areas of the market that may be priced more attractively. One place we believe warrants attention is the small/mid-cap market which, despite the economic gloom, can count a multitude of factors as relative tailwinds.

Key takeaways

  • The recent rally in stocks presents a challenging starting point, and forces investors to look for areas of the market where the entry point looks attractive on a relative basis.
  • Small and mid-cap stocks have underperformed as inflation and recession risks have taken center stage. Relative valuations sit, in some cases, near multi-decade lows.
  • Despite the economic gloom, we believe that alongside compelling valuations, a more resilient business investment environment and a strong U.S. dollar each offer tailwinds for SMID relative performance.

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Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Andrew Korz

Director, Investment Research

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