Thanks to an improving U.S. economy and reassuring earnings released so far, market sentiments remain strong, overriding worries over the presidential election, uncertainty regarding the magnitude and timing of Fed rate cuts, and volatility in the oil patch due to geopolitical tensions. Stimulus measures in China also supported the rally as this quelled global growth worries a bit.

But note that though the odds of a severe downturn are pretty low at the current level (or nil to tell you the truth), the fact remains that the U.S. economy and market are far from being super-healthy.

Inflation Worries Still Remain

Oil prices rallied 9.4% past month due to a flare-up in geopolitical tensions between Iran and Israel. Oil price rally sparked inflation fears. The CNN Fear & Greed Index is currently flashing "GREED," with an elevated reading of 72 — not far from the threshold for "EXTREME GREED" triggered at 75. This reflects optimism, but it also raises a contrarian cautionary flag: Markets may be underestimating risks.

Lowered Corporate Earnings Expectations

Estimates for 2024 Q3 have come down since the start of the quarter on July 1, with the magnitude of estimate cuts significantly bigger than what we had seen in the comparable periods of other recent quarters. This negative shift in the revisions trend has reversed the prior favorable development on this front in recent quarters.

Total S&P 500 earnings are currently expected to be up 3.7% from the same period last year on 5.1% higher revenues. Estimates have steadily come down since the start of the period, with the current 3.7% growth pace down from 6.9% at the start of July. The trend doesn’t favor large-cap stocks.

Rise in Stock Valuation Despite Uptick in Treasury Yields

Stock valuations have risen despite higher treasury yields. Higher yields tend to affect equity valuations negatively as this means that bonds are offering more investment competition to stocks and that future company cash flows are valued less highly. That means that stock valuations could record further uptrend ahead if the Fed delivers its widely expected cuts and yields a slump.

Wining Argument Behind Mid-Cap Investing

A bet on small-cap stocks is not reasonable as this part of the capitalization spectrum better reflects the domestic economic health. And U.S. economic growth may be hindered due to the likelihood of not-so-fast rate cuts.

Apart from the above-mentioned issues, geopolitical tensions put large-cap stocks in jeopardy as mega-cap stocks have considerable exposure in foreign lands. Also, if the Fed rate cut momentum slows and the U.S. dollar remains firm, adverse currency translation may gain an upper hand and hurt large-cap stocks. This theory makes mid-cap ETFs more intriguing as these offer the best of both worlds.

Mid-Cap ETFs in Focus

Below we highlight a few mid-cap exchange-traded funds (ETFs) that have gained the most in the past month.

Alger Mid Cap 40 ETF (FRTY Quick QuoteFRTY - Free Report) – Up 12.5%

Invesco S&P MidCap Momentum ETF (XMMO Quick QuoteXMMO - Free Report) – Up 9.2%

American Century Mid Cap Growth Impact (MID Quick QuoteMID - Free Report) – Up 8.5%

Nuveen ESG Mid-Cap Growth ETF (NUMG Quick QuoteNUMG - Free Report) – Up 8.3%

First Trust Mid Cap Growth AlphaDEX Fund (FNY) – Up 8.2%