Market Update: Small-Cap Stocks Enter Bear Market
A trader monitors activity on the New York Stock Exchange (NYSE) during the opening bell in New York City on April 3, 2025.
Charly Triballeau | Afp | Getty Images
Small-Cap Stocks Hit Hard by Tariffs
Small-cap stocks, previously considered likely beneficiaries of President Donald Trump’s policies, plunged into bear market territory on Thursday. This followed a significant stock market decline triggered by the government’s aggressive tariff implementation.
The Russell 2000 Index fell over 5% on Thursday, accumulating losses close to 21% since its record high on November 25. In Wall Street terminology, a drop of 10% signals a correction, while a 20% decrease indicates a bear market. Meanwhile, both the S&P 500 and Nasdaq Composite have entered correction territory, and the Dow Jones Industrial Average is just shy of that threshold.
Economic Challenges Facing Small Caps
Keith Lerner, co-chief investment officer at Truist, explained to CNBC that small-cap stocks are suffering due to a weakening economy, which is expected to negatively impact profits. Furthermore, these companies often bear high interest payments on debt associated with floating-rate loans, pushing them into a challenging position.
From Gains to Losses
This downturn contrasts starkly with the post-election surge, where small caps were regarded as beneficiaries of deregulation, tax cuts, and tariffs since they are less embedded in the global market compared to large-cap stocks. In fact, the Russell 2000 achieved an 8.6% gain during the election week, outpacing the S&P 500’s 4.7% increase.
Sector Vulnerabilities and Future Outlook
Stocks such as Victoria’s Secret and Urban Outfitters have contributed to the decline, as their reliance on foreign products makes them susceptible to elevated costs from tariffs. Moreover, small-cap companies, due to their size, lack the financial resilience that larger firms possess in times of economic change. JPMorgan has warned that ongoing tariffs could push the U.S. economy into a recession.
Potential for Recovery
Steven DeSanctis, an equity strategist at Jefferies, remarked on the precarious situation, noting that typically small caps tend to decline by 13% in the early stages of a recession. However, he is hopeful that small stocks may find a bottom if the Federal Reserve resumes cutting interest rates. Current expectations suggest a 58.5% chance for four rate cuts by the end of 2025, with a strong possibility of a cut in June.
Long-Term Predictions
In conclusion, while small caps are struggling now, there may be light at the end of the tunnel if the Fed intervenes. Lerner, who has a cautious stance on small caps, also anticipates that an emphasis on deregulation and a resurgence in mergers and acquisitions could facilitate recovery later in the year as economic conditions stabilize. Unlike small caps, he believes that large caps are less likely to enter bear market territory, as they remain significantly shielded from the turmoil affecting their smaller counterparts.
