Mid-caps vs large-caps — the index-graduation drag (new) Mid-caps ▲ over a decade; cautious near term

2026-AUG-17 — David Hay (Haymaker), re-underwriting the Mar-18-2024 IJH call after it lagged (+30% price / +33% total return / ~12½% CAGR vs the S&P's 50%): the gap is construction (cap-weighting, "the top 10 S&P constituents represent 38%") plus mega-cap earnings quality, not mid-cap failure. The structural edge is index inclusion mechanics — mid-cap indices hand their parabolic winners to the S&P at peak market cap. SMCI, Haymaker's own 2024 example, was promoted "almost as soon as we hit 'Send'" and has derated "like by nearly 70%" since; Tesla was "a much more impactful — and controversial — example of messy index inclusion." Negligible per event, "but when multiplied by dozens, if not hundreds, of these events, that can add up to a material performance drag over time." Mid-caps are not cheap on their own history (17× forward, "close to the peak this decade"), so near term "we'd be cautious even with Mid-Caps" and "we wouldn't quibble with booking some gains on IJH" — but "Mid-Caps/IJH have clobbered the S&P 500 for the full duration of the 21st century" and "over the next 10 years, we are adamant that Mid-Caps will dramatically outperform." Slegers 2026-JUN-25: the relative-valuation extreme quantified — SMID-cap forward PE at 0.87x the large-cap multiple against a 1.15x average since 2004, the lowest of the series, with a coverage gap as the structural reason (11 analysts per SMID security versus 26 for an S&P 500 constituent; small caps are 51% of US listed securities by count). Acted on with a scheduled $500/€500 small-cap top-up rather than a rotation call. Pieter Slegers (Compounding Quality), 2026-FEB-19 quantifies the discount and its history: "Mid Caps: 29% cheaper than large caps. Small Caps: 32% cheaper than large caps… Between 2004 and 2020, smaller companies traded at a premium. Today, smaller companies trade at the lowest relative valuation in 25 years. Since 2020, the valuation gap has only become wider." The long-run premium is put at 1.8% a year (a $10,000 investment over twenty years: $89,800 in small caps against $64,870 in large). His caveat is on the vehicle rather than the factor — a broad index "includes a lot of unprofitable companies," so the expression should stack profitability and returns-on-capital screens on top of size ("Small-High Quality"). Verdict on the other side of the trade: "I think the market is in an exaggeration phase for many large caps."