Small Cap Stocks Losing Earnings Steam

The global growth outlook, more than a smoothing of the Trump bump, has resulted in small-cap stocks losing the upper hand—a dramatic shift from what happened right after the election. This according to The Wall Street Journal’s Steven Russolillo.

Small-cap stocks (those with market capitalizations generally under $2 billion) spiked by more than 11% between the election and last Thanksgiving, writes Russolillo, who explains that many traders bet on the new president’s tax cuts and infrastructure spending plans (that would be most beneficial to smaller companies). But the gains have “fizzled.”

“The main factor behind the recent weakness is earnings growth,” says Russolillo. He cites projections by the firm RBC Capital Markets showing that S&P 500 companies with larger global exposure are “expected to report twice the earnings growth as companies that are more domestically focused.”

According to Russolillo, “Conditions have sharply changed from a year ago, when the strong U.S. dollar and a weak global economy sapped earnings growth from many multinational companies. The difference this time,” he writes, “is economic risks around the world have receded,” adding that the general mood in overseas business and financial markets is more optimistic.

“But if earnings are a true barometer of the market’s performance,” Russolillo concludes, “don’t be surprised if small caps’ recent weakness continues.”

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