Mid-cap software and services have staged a sharp—but uneven—recovery since the 2022 bear market. Using mid-cap tech proxies, the S&P MidCap 400 Information Technology sector shows roughly ~22% annualized gains over the last three years (price return), reflecting a decisive rerating as rates stabilized and earnings re-accelerated.
Equal-weight software exposure tells a similar story but at a lower gear: the SPDR S&P Software & Services ETF (XSW), which tilts small/mid and excludes hardware, delivered ~19.8% three-year annualized total returns (to 6/30/2025). Cloud-pure-plays lagged: WisdomTree Cloud Computing (WCLD), a mid/small-cap cloud basket, compounded at ~9% over the same window. The spread captures the cycle’s core reality: profitable, diversified software outperformed narrow, consumption-sensitive cloud names.
Two structural forces explain most of the dispersion. First, rate sensitivity and the cost of capital: as “higher-for-longer” settled in, the market shifted from revenue-only growth to Rule-of-40 discipline (growth + margin). Names with durable gross margins, improving non-GAAP operating income, and visible free cash flow kept their multiples; cash-burn models were derated. S&P’s sector dashboard shows this with elevated intra-sector dispersion among small and mid-cap IT, an environment that rewarded selection over blanket beta.
Second, AI’s applied layer favored vendors embedded in workflows (security, DevOps, data plumbing, vertical SaaS) over pure infrastructure bets. Budget owners prioritized AI features that reduce unit costs (agentic automation, coding assist, anomaly detection) or lift net retention, not speculative “AI for AI’s sake,” reinforcing a profitability premium. Industry outlooks for 2025 point to rising IT spend tied to AI integration rather than net-new blank checks, keeping scrutiny on payback periods, as noted by Deloitte.
Definition matters. “Mid-cap” is typically $2–$10 billion in market value; this band captures firms past product-market-fit but still early in operating leverage. They are small enough to grow above GDP via share gains, yet large enough to fund R&D without constant dilution, hence their historic tendency to punch above their weight in upcycles.
Within software and services (excluding hardware), the last three years rewarded three playbooks: (1) platform consolidation: suites displacing point tools; (2) contracting to value: seat-to-usage shifts that align price with ROI; and (3) AI co-pilots bundled into existing SKUs, raising ARPU with minimal CAC.
The midcap tech industry can expect continued bifurcation. Pipelines suggest a pickup in outcome-based deals and vendor consolidation, with mid-caps increasingly competitive on AI-enabled services and tooling, sometimes outmaneuvering slower incumbents. (Large-ticket AI/automation wins flowing to mid-tier providers have already surfaced.) At the same time, M&A should re-open: private equity dry powder plus strategic buyers looking for accretive ARR and AI capabilities create an exit bid for sub-scale assets, another historical tailwind for quality mid-caps during late-cycle slowdowns.
Bottom line: mid-cap software/services delivered mid-teens to low-20s annualized over three years, but with wide outcome dispersion by business model. With capital still priced, the market will likely keep rewarding free-cash-flow compounding, disciplined AI monetization, and vendors that demonstrably lower customers’ cost to build, run, or secure software. In this segment, unit economics beat narratives, and selection matters more than ever.
Methodology
For our list of the best performing mid-cap tech stocks in the last 3 years, we picked stocks from the information technology industry in the mid-cap range ($2 billion – $10 billion) that had the highest 3-year return CAGR, and ranked them in ascending order. The 3-year return CAGR was sourced from Stock Analysis, and is calculated using the compound annual growth rate of the total return of each stock. Additionally, we have mentioned the hedge fund sentiment for each stock, as of Q2 2025.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
10. Formula Systems (1985) Ltd. (NASDAQ:FORTY)
Market Cap: $2.20 Billion
3Y CAGR: 22.18%
Number of Hedge Fund Holders: N/A
Formula Systems (1985) Ltd. (NASDAQ:FORTY) is one of the best-performing midcap tech stocks in the last 3 years, riding steady earnings growth and strategic portfolio realignment. On August 13, 2025, the Israel-based IT and software holding company announced that Advent International would acquire its insurance-software subsidiary Sapiens International Corporation N.V. in an all-cash transaction, a landmark deal underscoring private equity’s appetite for mature, cash-flowing AI-enabled software assets.
The move shows Formula’s ongoing effort to streamline its holdings and unlock value across its diverse technology portfolio. In the second quarter of 2025, Formula reported record revenues of $743.4 million, up 11.3% year-over-year, marking its strongest quarter on record. The results were powered by robust demand in software services and enterprise automation, even as global IT spending remained uneven.
Headquartered in Or Yehuda, Israel, Formula Systems (1985) Ltd. (NASDAQ:FORTY) operates as a tech investment group with stakes in IT services, software, and digital transformation platforms across multiple geographies, an archetype of the disciplined, high-cash-flow mid-cap now favored by the market.
9. Parsons Corporation (NYSE:PSN)
Market Cap: $9.37 Billion
3Y CAGR: 28.33%
Number of Hedge Fund Holders: 40
Parsons Corporation (NYSE:PSN) is one of the best-performing midcap tech stocks in the last 3 years. On October 2, 2025, Parsons (NYSE:PSN) announced that it had acquired Applied Sciences Consulting, Inc., a Tampa, Florida–based engineering firm specializing in water and stormwater management solutions. The all-cash transaction will integrate Applied Sciences into Parsons’ North America Infrastructure business unit, expanding its capabilities in water infrastructure, hydrology, and flood-control systems.
Parsons stated that the acquisition enhances its resilience and water-infrastructure delivery expertise, particularly in the southeastern U.S., a region expected to benefit from substantial federal and state investment in climate-resilient projects. The company emphasized that the deal aligns with its disciplined M&A strategy, targeting transactions that are accretive and meet revenue growth and adjusted EBITDA margin thresholds above 10%.
Parsons Corporation (NYSE:PSN) is based in Chantilly, Virginia. The company provides engineering, cyber, defense, and critical-infrastructure modernization services to government and private clients worldwide. The Applied Sciences acquisition underscores its focus on combining traditional engineering with advanced modeling and data-driven infrastructure solutions.
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