Shifting to Mid Cap as Economy and Market Remain Resilient
Northlake’s Market Cap Model is shifting from large cap to mid cap for July, while the Style Model remains unchanged in favor of value. As a result, clients using Northlake’s model-driven strategies will sell positions in the S&P 500 ETF (SPY) and buy the S&P MidCap 400 ETF (MDY). Positions in the Russell 1000 Value ETF (IWD) will be maintained.
The Market Cap shift reflects a meaningful improvement in internal stock market technical and trend indicators. Small and mid cap stocks have recently experienced their best stretch of relative performance in several years, strong enough to move the model away from large cap and toward mid cap exposure.
External indicators remain more balanced. Economic data continues to support a constructive view of the U.S. economy, which historically has been helpful for smaller and more cyclical companies. At the same time, higher interest rates remain a headwind. The result is a disciplined move to mid cap rather than small cap.
The Style Model remains in value mode. Internal indicators were little changed and continue to show support from companies tied to artificial intelligence infrastructure. While AI is often discussed as a large cap growth theme, the market impact has been broader. Semiconductor memory, data center energy, and data center operations have contributed to performance across different market caps and style categories, including areas represented in value indices.
External indicators also continue to favor value. The U.S. economy has remained resilient, supporting more cyclical sectors and value-oriented strategies. This backdrop remains relevant beyond the model-driven portfolios. Northlake’s non-model thematic strategies in developed international, emerging markets, industrials, financials, and health care are unchanged this month, with several maintaining value or cyclical exposure.
The SPY position closing today worked well, with large cap stocks outperforming the prior mid cap signal by about 100 basis points over the past three months. The value signal that began in early February has also worked well, with IWD outperforming the Russell 1000 Growth ETF (IWF) by almost 4%. Recent relative performance has still been volatile, reinforcing the value of a model process focused on intermediate- to longer-term trends rather than day-to-day market moves.
Looking ahead, we will be watching whether market leadership continues to broaden, how investors respond to ongoing AI infrastructure investment, and whether economic data remains supportive of cyclical exposure. We will also monitor potential changes in Federal Reserve leadership, policy approach, and market expectations for interest rates.
Northlake Capital Management, LLC is a state-registered investment adviser. Registration does not imply a certain level of skill or training. Additional information about Northlake, including current registration status, is available through the SEC’s Investment Adviser Public Disclosure website. This material is for informational purposes only and is not investment advice or a recommendation to buy or sell any security. Investing involves risk, including possible loss of principal. Past performance does not guarantee future results. Northlake, its employees, and clients may hold positions in securities referenced. Opinions are as of the publication date and are subject to change without notice.
