Stocks of smaller companies have had a plain old bad year. They’re particularly cheap now, and their fundamentals may very well improve soon.
The S&P Small Cap 600, comprised of companies with an average market capitalization of about $2 billion, is down just over 4% this year, compared with the large-cap S&P 500’s 14% gain.
That is no surprise. The S&P 500 is weighted by market capitalization, so the enormous tech companies that have been rallying in response to optimism about artificial intelligence have helped the overall benchmark to rise.
Earnings have been an issue for small-caps. Analysts expect aggregate sales this year for the S&P 600 to drop almost 1% year over year, according to FactSet. That would send earnings per share down 14% as profit margins drop.
Perhaps more important, smaller companies have a harder time than bigger businesses dealing with higher interest rates—by far the most prominent element of the economic landscape since the Federal Reserve began boosting borrowing costs in March 2022. Bigger companies tend to find it easier to control costs, protecting their profit margins, when higher rates choke off sales growth by limiting demand for goods and services, Barron’s reports.
The good news is that the data indicate the worst is likely over Read more.