Goldilocks might be onto something.

Over the past week, investors were busy figuring out the best way to play the Federal Reserve’s decision to lower interest rates for the first time since 2020.

I asked a number of strategists which stocks stand to benefit the most going forward. Surprisingly, it’s not large or small caps — the two trades that have dominated market headlines in recent months. Rather, mid-cap stocks, an often forgotten trade, may be best positioned for a breakout.

“Historically, midcaps really start to outperform once the Fed actually starts cutting rates,” Carson Group’s Ryan Detrick told me.

Detrick sees small and mid caps surging up to 20% in the next 12 months, far outperforming large-cap peers. The Russell 2000 (^RUT) — the small-cap index — has soared 10% since the end of June, compared to the S&P 500’s (^GSPC) 4.7% rise.

Recent analysis by Goldman Sachs found that mid caps typically outperform large- and small-cap stocks in the 12 months following the first rate cut. As confidence in a soft landing grows, investors are becoming more comfortable reaching for options outside of the biggest companies.

“The start of the Fed rate cutting cycle is a potential source of incremental equity demand and boost to investor risk sentiment,” Goldman Sachs’ Jenny Ma wrote in a note to clients earlier this month. “In the short term, mid-cap performance relative to other segments will hinge on the strength of economic growth data and the pace of the Fed's easing cycle.”

The team sees low valuations and resilient economic growth as catalysts for future gains and expects a 13% return for the S&P 400 (^SP400) index over the next 12 months.

“This is a sentiment-driven market rotation based on soft landing hopes, benefiting the riskiest areas of the market, as the earnings backdrop is on another planet,” John Hancock investment management co-chief investment strategist Emily Roland told me.

Mid caps are the “best hedge” for the near term, per Bank of America’s Jill Carey Hall.

“Mid caps have seen better recent guidance and revision trends, have outperformed small caps on average in Downturn regimes … and serve as a hedge against fewer-than-expected Fed cuts, given small caps' rate sensitivity/ refinancing risk,” Hall wrote in a note to clients

Investors have priced in roughly 75 basis points of cuts before the end of the year and see the policy rate falling to the 3% to 3.25% range by mid-2025, exceeding the Fed’s own projections.

Remember though, this isn’t new for Wall Street, which started the year pricing in roughly six interest rate cuts for 2024.