Sep 10, 2026 · 40 min · 12 segments
How the AI Infrastructure Boom is Reshaping the Case for Small and Mid Cap Equities In this episode of the Pender podcast, Aman Budhwar, Portfolio Manager of the Pender US Small/Mid Cap Equity Fund…
Aman BhugraGuestLaura BakerHostYeah, for sure, and when you talk about the concentration, I know this has come up in conversations before, is these Magnificent Seven names are pretty concentrated just within the technology space, whether it be the technology GICS specifically, but w-what do you think investors are missing when they focus all their attention on these mega large caps and don't look down cap? What parts of the economy could they kind of get more exposure to?
Yeah, as a comparison, if you look at the S&P mid cap index, uh, the top 10 stocks there have a weight of less than 10%, and in fact, the single largest index in the S&P mid cap is, uh, industrials, which is at a weight of about 24%, so I think that's quite reasonable.
So when you invest in the S&P mid cap index, you're getting a more diversified portfolio, and like you said, what an investor in the large cap index, which is so concentrated, is missing is that there are several other drivers for growth in the economy as well as in, uh, earnings for these companies beyond the AI theme, which is really driving those MAG seven stocks.
And, you know, in fact, several of these industrial companies benefit from the capital investment that these large cap hyperscalers are doing.
Uh, so the market has gotten a little bit fidgety about the amount of capital investment going into the data centers, and people have started questioning the return on that investment.
As well as in some cases, they're looking at how the dollars are moving around and thinking about, uh, circular...
Is this circular financing? And if that concern starts to grow, I think maybe those stocks that have been, uh, the darlings of the market so far might in the future underperform, or, or at least at the, at the very least, they'll not generate the same amount of free cash flow that investors have been used to Uh, but on the contrary, their capital investment is generating a lot of opportunities for the small and midcap industrial space, which is where we have positioned the portfolio to benefit from all the capital investment that's happening in the US economy.
No, I think that's a really good point, is that you're not saying that these companies are bad businesses or they're not generating cash.
It's just that at this point, there are so many other attractive opportunities where maybe the numbers do look a little bit more attractive, especially looking forward from a growth perspective.
And in addition to that growth, uh, divergence that's gradually narrowing and actually turns in favor of small caps that are expected to grow even faster if you look at consensus earnings growth for '27 and '28.
On a forward earnings basis, the midcap index is trading at about 16 times, whereas the large cap is trading at 20 times.
So you have that four-turn spread between the two indices, whereas historically, the midcap, uh, index has traded at a premium to large cap, in part because they typically have faster growth.
So as I said, we're coming to a, a phase in the market where these small midcap companies have faster growth in the future, but they're still trading at a discount to the large cap.
So I think that is that opportunity that investors can exploit going forward by investing in the small midcap space.
Sometimes when we hear the phrase about, oh, there's a valuation gap or it's they've been cheap for so long, there is a bit of concern about inexpensive companies can remain that way for years, and if there isn't an immediate catalyst on the horizon, what is the thing that's going to kind of turn the ship or make these companies more attractive once again? I know that there's a lot of different sectors, but when you think about catalysts in the small and midcap space, are there certain things that you'd think investors should be monitoring to take another look at these, this, the small and midcap space?
If you go back a few years, coming out of COVID, I mean, just in terms of thinking about why the earnings growth has not been as strong in the last couple of years.
So the small cap and midcap space, which are more geared towards the domestic economy, th- they took a bit of a hit during that phase, and you're seeing that partially in the growth in their revenue, but also in their margins where maybe they were impacted by the fact that inflation had been very strong, and they were not able to pass on the inflation that they were seeing.
But I think on a go-forward basis, I'm not saying inflation is going to come down, but we've been at a trend level of inflation where it's come down somewhat from the highs we had seen in the past.
Yeah, for sure, and when you talk about the concentration, I know this has come up in conversations before, is these Magnificent Seven names are pretty concentrated just within the technology space, whether it be the technology GICS specifically, but w-what do you think investors are missing when they focus all their attention on these mega large caps and don't look down cap? What parts of the economy could they kind of get more exposure to?
Yeah, as a comparison, if you look at the S&P mid cap index, uh, the top 10 stocks there have a weight of less than 10%, and in fact, the single largest index in the S&P mid cap is, uh, industrials, which is at a weight of about 24%, so I think that's quite reasonable.
So when you invest in the S&P mid cap index, you're getting a more diversified portfolio, and like you said, what an investor in the large cap index, which is so concentrated, is missing is that there are several other drivers for growth in the economy as well as in, uh, earnings for these companies beyond the AI theme, which is really driving those MAG seven stocks.
And, you know, in fact, several of these industrial companies benefit from the capital investment that these large cap hyperscalers are doing.
Uh, so the market has gotten a little bit fidgety about the amount of capital investment going into the data centers, and people have started questioning the return on that investment.
As well as in some cases, they're looking at how the dollars are moving around and thinking about, uh, circular...
Is this circular financing? And if that concern starts to grow, I think maybe those stocks that have been, uh, the darlings of the market so far might in the future underperform, or, or at least at the, at the very least, they'll not generate the same amount of free cash flow that investors have been used to Uh, but on the contrary, their capital investment is generating a lot of opportunities for the small and midcap industrial space, which is where we have positioned the portfolio to benefit from all the capital investment that's happening in the US economy.
No, I think that's a really good point, is that you're not saying that these companies are bad businesses or they're not generating cash.
It's just that at this point, there are so many other attractive opportunities where maybe the numbers do look a little bit more attractive, especially looking forward from a growth perspective.
And in addition to that growth, uh, divergence that's gradually narrowing and actually turns in favor of small caps that are expected to grow even faster if you look at consensus earnings growth for '27 and '28.
On a forward earnings basis, the midcap index is trading at about 16 times, whereas the large cap is trading at 20 times.
So you have that four-turn spread between the two indices, whereas historically, the midcap, uh, index has traded at a premium to large cap, in part because they typically have faster growth.
So as I said, we're coming to a, a phase in the market where these small midcap companies have faster growth in the future, but they're still trading at a discount to the large cap.
So I think that is that opportunity that investors can exploit going forward by investing in the small midcap space.
Sometimes when we hear the phrase about, oh, there's a valuation gap or it's they've been cheap for so long, there is a bit of concern about inexpensive companies can remain that way for years, and if there isn't an immediate catalyst on the horizon, what is the thing that's going to kind of turn the ship or make these companies more attractive once again? I know that there's a lot of different sectors, but when you think about catalysts in the small and midcap space, are there certain things that you'd think investors should be monitoring to take another look at these, this, the small and midcap space?
If you go back a few years, coming out of COVID, I mean, just in terms of thinking about why the earnings growth has not been as strong in the last couple of years.
So the small cap and midcap space, which are more geared towards the domestic economy, th- they took a bit of a hit during that phase, and you're seeing that partially in the growth in their revenue, but also in their margins where maybe they were impacted by the fact that inflation had been very strong, and they were not able to pass on the inflation that they were seeing.
But I think on a go-forward basis, I'm not saying inflation is going to come down, but we've been at a trend level of inflation where it's come down somewhat from the highs we had seen in the past.
The rest of this transcript — segmented and speaker-labeled, so you land on the exact moment something was said
Search every transcript — by keyword, by phrase, or by meaning, across every show Radar indexes
Trends — what is surging across podcasts, measured against its own baseline
Alerts — when a name you follow appears in a newly indexed episode
No account is needed to search Radar.