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Chart of the week

Private and public company earnings taking divergent paths

This week’s chart looks at a shifting opportunity set as the private middle market shines while small cap company earnings remain challenged.

February 23, 2024 | 3 minute read

Russell 2000 earnings deteriorate, middle market revenues improve

Line chart documenting shift from 2012 to 2024, highlighting the recent strong private middle market revenue growth trajectory with increasingly negative small cap earnings.

Source: Macrobond and Bloomberg Finance, L.P., as of December 31, 2023. Annual middle market revenue growth figures represent quarterly averages.

  • Stocks’ strong return over the past year may mask a shifting investment opportunity set from public markets toward private investments.
  • Most of the S&P 500’s recent growth has been driven by select mega cap technology stocks. Additionally, the number of public companies has significantly declined over the last 20 years due to skyrocketing costs for public companies combined with their need to prioritize short-term analyst expectations over long-term growth.
  • What’s more, the percentage of small cap companies generating negative earnings (black line, inverted) has risen from about 25% in 2012 to 40% today.1
  • Over the same time frame, the investment opportunity set within private U.S. middle market companies—about 200,000 firms with revenues of $10 million to $1 billion—has become increasingly attractive.2 As the chart shows, 83% of middle market firms reported positive year-over-year revenue growth in 2023, representing the highest number on record.1
  • Against this backdrop, investors may be wise shifting their portfolios toward where opportunities have evolved. The private U.S. middle market may offer differentiated sources of growth, income and diversification.

  • Macrobond and Bloomberg Finance, L.P., as of December 31, 2023. Annual middle market revenue growth figures represent quarterly averages.

  • National Center for the Middle Market, as of Q4 2023.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

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