Mid-Cap Growth Investing in 2025: High-Conviction Opportunities in a Post-Recessionary Recovery

The post-recessionary recovery phase of 2025 has ushered in a complex yet fertile environment for mid-cap growth investing. As global markets grapple with shifting trade policies, inflationary pressures, and evolving industrial strategies, the Virtus KAR Mid-Cap Growth Fund's Q2 2025 Commentary offers critical insights into how strategic positioning can unlock value in this landscape. By analyzing the fund's performance and aligning it with macroeconomic trends, investors can identify high-conviction opportunities in sectors poised for resilience and innovation.

Strategic Positioning and Performance Insights

The KAR Mid-Cap Growth Strategy delivered strong absolute returns in Q2 2025, driven by holdings such as Celsius and Cloudflare, despite underperforming its benchmark2Q25 Portfolio Review Podcast: KAR Mid-Cap Growth Strategy^[2]. This divergence highlights the fund's focus on mid-cap names with durable competitive advantages, as opposed to the large-weight, high-beta stocks dominating the S&P 500®. For instance, Celsius's acquisition of Alani Nu—a functional energy drink brand with a strong female consumer base—expanded its market reach and demonstrated the power of strategic M&A in driving growth2Q25 Portfolio Review Podcast: KAR Mid-Cap Growth Strategy^[2]. Conversely, Freshpet emerged as a detractor due to operational challenges and competitive pressures in the fresh pet food market, underscoring the importance of robust business models in volatile environments2Q25 Portfolio Review Podcast: KAR Mid-Cap Growth Strategy^[2].

Portfolio managers emphasized the need for companies with pricing power, resilient supply chains, and exposure to secular trends like AI and industrial policy shifts2Q25 Portfolio Review Podcast: KAR Mid-Cap Growth Strategy^[2]. This aligns with broader macroeconomic themes, as mid-cap equities are increasingly viewed as a bridge between the innovation-driven growth of large-cap tech and the agility of smaller firms.

Macroeconomic Context: Navigating Uncertainty

The 2025 economic landscape is shaped by stagflation risks, with U.S. GDP growth projected at 1.6% and inflation near 4% by year-end2025 Mid-Year Outlook: U.S. Stocks and Economy^[4]. Tariff hikes and geopolitical tensions have created structural shocks to global trade, while the Federal Reserve's cautious approach to rate cuts—likely delayed until March 2026—adds to market uncertainty2025 Mid-Year Outlook: U.S. Stocks and Economy^[4]. Amid this, mid-cap stocks are trading at more attractive valuations relative to large-caps, which remain at historical premiums10 US Midcap Stocks For 2025: High-Growth Opportunities For Smart Investors^[1].

A key tailwind is the shift in industrial policy under the new administration, which prioritizes deregulation and targeted infrastructure spending over green energy subsidiesUS Midcap outlook: Themes to watch^[3]. This bodes well for sectors like construction and business services, where companies such as IES Holdings (up 310% in 52 weeks) and Payoneer Global (up 109%) are capitalizing on infrastructure spending and cross-border e-commerce growth10 US Midcap Stocks For 2025: High-Growth Opportunities For Smart Investors^[1]. Similarly, the Software & Services sector is thriving, with Sezzle (up 3,996%) leveraging BNPL platforms to tap into younger demographics10 US Midcap Stocks For 2025: High-Growth Opportunities For Smart Investors^[1].

High-Conviction Sectors and Stocks

1. Software & Services: The sector's growth is fueled by AI adoption and digital transformation. Cloudflare and Celsius exemplify how mid-cap firms are leveraging technology to scale efficiently2Q25 Portfolio Review Podcast: KAR Mid-Cap Growth Strategy^[2].
2. Biotechnology: Companies like Catalyst Pharmaceuticals and Corcept Therapeutics are benefiting from FDA approvals and demand for niche treatments10 US Midcap Stocks For 2025: High-Growth Opportunities For Smart Investors^[1].
3. Construction: Sterling Construction (up 212%) and IES Holdings are riding infrastructure spending tailwinds, with long-term demand from public and private projects10 US Midcap Stocks For 2025: High-Growth Opportunities For Smart Investors^[1].
4. Retail: Abercrombie & Fitch's rebranding and e-commerce pivot highlight the potential for mid-cap retailers to adapt to shifting consumer preferences10 US Midcap Stocks For 2025: High-Growth Opportunities For Smart Investors^[1].

Strategic Considerations for Investors

While the macroeconomic environment remains volatile, mid-cap growth investing offers a compelling balance of innovation and resilience. Investors should prioritize companies with:
- Strong EBITDA margins to withstand inflationary pressures.
- Diversified revenue streams to mitigate sector-specific risks.
- Scalable business models aligned with secular trends like AI and infrastructure.

However, caution is warranted. The KAR fund's underperformance relative to its benchmark in Q2 2025 underscores the risks of concentration in mid-cap names during periods of large-cap dominance2Q25 Portfolio Review Podcast: KAR Mid-Cap Growth Strategy^[2]. Diversification across sectors and geographies, coupled with active monitoring of policy shifts, is essential.

Conclusion

The post-recessionary recovery of 2025 presents a unique window for mid-cap growth investors. By leveraging the strategic insights of funds like KAR and aligning with macroeconomic tailwinds, investors can capitalize on high-conviction opportunities in sectors poised for long-term resilience. As the Federal Reserve navigates inflation and policymakers reshape industrial strategies, agility and a focus on quality will be paramount.