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Chart of the week

As small caps return to favor, quality remains a concern

Markets have turned risk-on since the election, as investors again embrace small caps. But 43% of Russell 2000 companies generate negative earnings.

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November 15, 2024 | 2 minute read

Share of Russell 2000 with negative earnings

Line chart showing the percentage of Russell 2000 (small cap) companies that generate negative earnings. The percentage has gradually moved higher, from 14% in 1994, to 43% as of Q3 2024. The diminishing quality of public small cap companies highlights the larger shift in the investment opportunity set and suggests private markets may offer better access to firms with stronger growth prospects.

Source: Bloomberg Finance, L.P., Russell 2000 Index. Data as of 3Q 2024. Shaded areas indicate NBER-declared U.S. recessions.

  • Markets have ripped higher since the U.S. presidential election as investor sentiment spikes and the Trump trade continues to gain steam.
  • Small-cap stocks have outpaced the S&P 500 since the election as investors expect these companies to benefit from a lower-tax environment. This is in direct contrast to their relative underperformance prior to the election (the Russell 2000 returned 10.7% through November 4, compared to 21.1% for the S&P 5001).
  • Despite the recent resurgence of small cap stocks, our chart highlights a potential longer-term challenge: Their quality has meaningfully deteriorated over the past several decades.
  • The percentage of Russell 2000 companies producing negative earnings has risen from just 14% in 1994 to 43% as of Q3 2024.2
  • Higher-quality firms are staying private for longer as many seek to avoid short-term pressures from public shareholders and the costs associated with the disclosures required of public firms. This trend highlights the larger shift in opportunity for investors and suggests private markets may offer better access to firms with stronger growth prospects.

  • Performance measured for the period from December 31, 2023-November 4, 2024.

  • Bloomberg Finance, L.P., Russell 2000 Index. Data as of 3Q 2024.

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