BofA’s Hartnett Believes Midcap Stocks Offer the Strongest Opportunity Before US Midterm Elections

US Small and Mid-Cap Stocks Poised for Gains Ahead of Midterms

According to Bank of America strategists, smaller US companies are expected to outperform as the midterm elections approach, while large technology firms are losing favor among investors.

Michael Hartnett and his team highlight that President Donald Trump’s assertive measures to lower costs in sectors such as energy, healthcare, credit, housing, and utilities are putting pressure on major players in these industries, including energy corporations, pharmaceutical companies, banks, and leading tech firms. As a result, small and mid-cap stocks are positioned to benefit most from the current economic environment leading up to the elections.

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“We’re favoring Main Street over Wall Street until there’s a shift in Trump’s approval ratings driven by policies addressing affordability,” the strategists commented in their report.

Recently, investors have been moving away from technology stocks due to worries about the impact of artificial intelligence. Instead, they are seeking opportunities that could benefit from the Trump administration’s focus on reducing living expenses. Companies that are sensitive to economic growth have also been outperforming the broader market.

Market Performance and Shifting Trends

This week, the Nasdaq 100 experienced its steepest three-day decline since April, dropping 4.6%. Meanwhile, the S&P 500 has lagged behind its equal-weighted counterpart by 4.2 percentage points since the beginning of the year.

Bank of America notes that the market is witnessing a transition from asset-light to asset-heavy business models, which could pose a significant challenge to the dominance of the so-called Magnificent Seven tech stocks.

The strategists estimate that major tech companies will allocate approximately $670 billion—or 96% of their cash flow—to AI-related capital expenditures this year, a sharp increase from 40% in 2023. “These companies no longer have the strongest balance sheets or the largest share buybacks,” they observed.

Hartnett’s call to favor international stocks since late 2024 has been validated, as US equities have underperformed compared to global markets.

Reporting assistance by Michael Msika and Sagarika Jaisinghani.

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