U.S. midcap, small-cap stocks might benefit from mean reversion

Driven by growth technology companies, large-cap stocks have outpaced their midcap and small-cap equity peers. The performance difference is significant year-to-date and over the one-, three- and five-year times frames ended July 31.

One wonders whether a mean reversion will take place anytime soon. There is currently a significant difference in valuations. Large-cap stocks currently have a price-to-earnings ratio of 23.86 vs. 20.33 and 17.65 for midcap and small-cap, respectively.

There is also a significant difference in the sector diversification. Midcap and small-cap have significantly more exposure to industrial, real estate and financial firms.