As the UK stock market recovers, mid-caps have taken an early lead.
- The FTSE 250 is up 21% in the last three months
- The mid-cap yield remains near historic highs
- Mid-caps are still trading at lower valuations and with higher earnings growth
The UK stock market is only in the foothills of its revival. These recoveries usually follow familiar patterns – investors embrace large caps and index heavyweights, before eventually exploring the opportunities further down the market cap spectrum. The UK market appears to have accelerated this process, with the revival in the FTSE 100 now giving way to some breakout performance from the mid-caps.
The FTSE 250 is up 21% in the last three months alone. The various small and mid-cap managers that had been calling it a ‘once-in-a-generation opportunity’, saying valuations were at all-time lows, have belatedly been proved correct. The mid-caps have even outpaced a resurgent S&P 500.
The signs were there. Corporate buyers were snapping up UK mid-caps at breakneck speed, with companies enthusiastically buying their own stock. The yield on the FTSE 250 briefly tipped over that of the FTSE 100. Even today, it is only just below it (3.41% versus 3.46%) and the FTSE Small Cap is even higher, at 3.8%.
There may be reasons to keep faith with mid-caps over the FTSE 100 even after their recent strong run. The FTSE 100 is flagging. Large caps with dollar earnings are disproportionately affected by the stronger pound and this is starting to depress the dividend yield. The latest Dividend Dashboard from AJ Bell shows aggregate dividend forecasts for the FTSE 100 in 2025 have slid from £83bn to 80.4bn.
AJ Bell also points out that the FTSE 100 now trades on a forward P/E ratio of 14x, which is “not far from historic norms, even if it still represents a historically large discount to the US market.” Over the last three months, forecasts for the FTSE 100’s total pre-tax income have ebbed to £231bn, down 7% over the quarter.
Contrast this to the mid-caps, which are currently trading at just over 11x, with aggregate earnings growth of 8.5%. In other words, even after a 20% bounce, mid-caps are still trading at lower valuations, similar yields and with higher earnings growth.
Mid-caps have a robust history of being the ‘sweet spot’ in the UK market. They have lost this crown in recent years thanks to a variety of problems – from UK domestic economic weakness and political turmoil to Covid and the interest rate cycle. But it had started to look anomalous. The smart money appears to be betting on a revival.
