Mid-Cap Equity Market Volatility and Strategic Positioning in Q2 2025: Evaluating Underperformance and Opportunities in the Touchstone Mid Cap Fund Amid Shifting Trade Policies and Market Cycles

The second quarter of 2025 was a rollercoaster for global markets, driven by a confluence of trade policy shifts, geopolitical tensions, and speculative fervor in high-growth sectors. For mid-cap equities, the period was marked by uneven performance, with the Russell Midcap Index posting an 8.5% return despite a rocky start [4]. The Touchstone Mid Cap Fund, however, underperformed its benchmark, recording a -9.45% return for the quarter [2]. This article dissects the factors behind this underperformance, evaluates the fund’s strategic adjustments, and identifies potential opportunities amid evolving market dynamics.

A Volatile Quarter: Tariffs, Geopolitics, and Sector Rotation

The Trump administration’s April 2025 tariff announcements—ranging from 10% base tariffs on foreign goods to reciprocal duties as high as 34% on Chinese imports—triggered a sharp selloff. The S&P 500 briefly entered bear market territory before rebounding with a 9% single-day rally, the largest gain since October 2008 [1]. Mid-cap stocks, while not as volatile as small-caps, faced headwinds as investors shifted toward speculative, low-profitability tech and AI companies [1]. Defensive sectors like healthcare and staples lagged, while cyclical sectors rebounded sharply post-April [5].

Geopolitical tensions further complicated the landscape. A 12-day conflict between Iran and Israel in June briefly disrupted sentiment but resolved by quarter-end, allowing U.S. indices to hit all-time highs [3]. Meanwhile, international markets outperformed, with the MSCI EAFE and MSCI EM Indices rising 12.1% and 12.2%, respectively, aided by favorable currency trends and valuations [3].

Touchstone Mid Cap Fund: Underperformance and Strategic Constraints

The Touchstone Mid Cap Fund’s -9.45% return in Q2 2025 starkly contrasted with the Russell Midcap’s 8.5% gain [2]. The fund’s commentary attributed this to heightened volatility from trade policy uncertainty and a proclivity for large-cap growth and international markets [1]. For instance, the Gain equity allocation strategy reduced exposure to high-beta small-cap and AI stocks, favoring international developed markets and dividend growth [5]. Conversely, the Protect equity portfolio noted mid-caps as “weakest contributors,” underscoring their vulnerability to policy-driven volatility [5].

The fund’s underperformance was compounded by its exposure to sectors sensitive to trade disruptions. Tariff-related supply chain adjustments and corporate profit uncertainty weighed on mid-cap companies, which often lack the scale to absorb such shocks [1]. Additionally, the fund’s active management approach, while historically competitive in three- to five-year horizons, struggled to navigate the rapid shifts in Q2 [5].

Strategic Adjustments: Risk Management and Tactical Shifts

In response to the volatile environment, the Touchstone Mid Cap Fund adopted several risk mitigation tactics. According to its Q2 commentary, the fund increased allocations to fixed income as bond yields hit decade highs, seeking higher yields and lower economic sensitivity [2]. A tactical overweight in investment-grade bonds was emphasized as a hedge against potential recessionary pressures [2].

Sector rotations also played a role. While the fund’s specific stock selections remain undisclosed, broader market trends suggest a shift toward defensive and value-oriented mid-cap stocks. For example, the Touchstone Dynamic International ETF, which employs a quantitative model to adjust to market dynamics, may have influenced similar strategies [4]. However, the fund’s underperformance indicates these adjustments were insufficient to offset the broader market’s pro-growth and pro-tech tilt [1].

Opportunities Amid Uncertainty

Despite Q2’s challenges, the mid-cap space holds latent opportunities. The market’s rebound post-April—driven by a pause in severe tariffs and strong Q2 corporate earnings (78% of S&P 500 companies exceeded expectations [1])—suggests resilience. For the Touchstone Mid Cap Fund, a renewed focus on sectors poised to benefit from fiscal stimulus and trade normalization could unlock value.

The One Big Beautiful Bill Act (OBBBA), which passed in Q2, offers clarity on tax incentives and workforce development, potentially boosting mid-cap companies with scalable growth models [2]. Additionally, as global trade frameworks stabilize, mid-cap firms with strong balance sheets and niche market positions may outperform. The fund’s long-term historical appeal—its 5-year average return of 10.60% [2]—hints at its potential to capitalize on these trends if strategically repositioned.

Conclusion

The Touchstone Mid Cap Fund’s Q2 2025 underperformance reflects the challenges of navigating a market dominated by speculative tech rallies and trade policy uncertainty. While the fund’s risk management tactics—such as fixed income allocations—provided some ballast, they were insufficient to counter the broader shift toward large-cap growth and international equities. However, the quarter’s volatility also created opportunities for strategic repositioning. As trade frameworks stabilize and fiscal clarity emerges, the fund’s active management approach could regain traction, particularly in sectors aligned with innovation and economic dynamism. For investors, the key takeaway is that mid-cap equities, while volatile, remain a critical component of a diversified portfolio—especially when managed with agility and foresight.

Source:
[1] Q2 2025 Performance Review: A volatile quarter for stocks [https://facet.com/investing/q2-2025-performance-review-a-volatile-quarter-for-stocks-ends-on-a-high/]
[2] Touchstone Mid Cap Growth Y (TEGYX) Performance History [https://finance.yahoo.com/quote/TEGYX/performance/]
[3] Q2 2025 Equity Market Observations - Intech Investments [https://www.intechinvestments.com/q2-2025-equity-market-observations/]
[4] Touchstone Dynamic International ETF [https://www.westernsouthern.com/touchstone/etfs/dynamic-international-etf]
[5] Second Quarter 2025 Quarterly Market Update: Push, Pull and Opportunity [https://thinkwealth.io/second-quarter-2025-quarterly-market-update-push-pull-and-opportunity/]