To say the financial media has noticed that small-cap stocks have underperformed large caps of late would be an understatement. Financial journalists have been a bit obsessed with the fact that the Russell 2000 has been lagging since July, while the S&P 500 has — with the exception of a decent pullback two weeks ago — held up rather well.

To put some numbers behind the observation, the Russell 2000 is down nearly 7% since the end of June, while the S&P 500 is around breakeven levels for the same time frame.

Moreover, that weakness from small caps has convinced more than a few pundits that all stocks are headed for a big setback, as small cap stocks tend to lead the market higher as well as lower. It’s a theory that’s been hotly-debated, of course. Many bulls maintain the overall market is poised to move higher, and that the weakness from small cap stocks is just a reflection of their inherent volatility.

It’s a healthy debate to be sure, even if neither side of table would ever concede. Putting all the focus on the interplay between large cap stocks and small cap stocks, though, has errantly drawn investors away from a segment of the market deserving of that kind of attention … mid-caps.

Mid-Caps Quietly, Rightfully out in Front

It’s probably no surprise that the SPDR S&P 500 ETF (SPY) has lagged the performance of the iShares Russell 2000 Index ETF (IWM) since the bull market began in March of 2009; aggressive and more fruitful small caps almost always lead a bull market.

What’s largely gone unappreciated — perhaps even unnoticed — about the bull market to date is that it’s actually been led by the mid-caps. The SPDR S&P MidCap 400 ETF (MDY) has gained 231% since March 2009, trailed by the 205% advance from the small-cap sliver of the market, which is trailed by the 180% gain from large caps over that nearly six-year stretch.

Can the mid-caps maintain that lead looking ahead?

While “past performance is no guarantee of future results,” the proverbial sweet spot that mid-caps have found themselves in has changed, and isn’t apt to change in the foreseeable future. That is, mid-cap companies aren’t subject to the currency volatility most large-cap companies (that rely on overseas sales and supplies) are, yet those same mid-cap companies enjoy funding and stability that most small-cap companies don’t benefit from.

And to be clear, mid-cap stocks deserved the gains they’ve made since early 2009. Since 2010, the S&P 400 has averaged annual earnings growth of 21.7%, while the S&P 500 has only averaged annual earnings growth of 16.7%. The coming year’s expected growth is just as disparate, with the pros looking for nearly 19% growth from mid-cap earnings, vs. only 14% income growth from large caps.

To be fair, small-cap stocks have technically fared better on the earnings growth front, trailing and projected. That growth from small-cap stocks generally comes at a price, though … a lot of volatility, and usually some disappointment. Mid-cap earnings growth, on the other hand, remains surprisingly stable and in a reliable uptrend.

The S&P 400 Mid Cap Index’s earnings chart also illustrates another key detail that’s been overlooked of late — they’re getting cheaper. The trailing P/E for the S&P 500 now stands at 20.7, and is a downtrend for reasons beyond the recent stumble. If one looks closely at the EPS trend in the chart above, it becomes clear that the pace of growth is perking up as of the current quarter.

Bottom Line for Mid-Cap Stocks

Although mid-cap stocks have lagged large caps since March of this year (though not as badly as small-cap stocks have lagged), it’s likely a short-term lapse in leadership.

How so? The broad domestic economic cycle is still in a growth phase, yet international trade is still inconsistent, with Europe toying with another recession and China’s economy continuing to slow. It bodes well for domestic mid-cap stocks as those companies tend to thrive moistly on domestic customers. Indeed, these corporations have already proven they can capitalize on the current scenario. The S&P 400’s steady earnings growth trend since 2009 is evidence to that end.

In other words, it’s time to put mid-caps back into the rhetoric, and back into portfolios.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.