Tariffs and trade wars have spooked investors of late. While few asset classes have been spared, US small-cap stocks have been particularly hard hit. At the same time, however, equity markets are showing signs of broadening, which could work in favor of small-caps over time.
Market turbulence can be jarring, and investors are rightly concerned about the short- and medium-term profitability of small-cap companies. Small-caps have underperformed in part because they’re perceived as being more economically sensitive than their larger-company counterparts.
Small Companies Could Be More Insulated from Trade Uncertainty
But today’s circumstances are unique. While tariffs and trade-policy uncertainty have likely slowed economic growth, the US economy is entering this period from a position of relative strength, with unemployment and inflation still low.
Trade tensions could eventually have a more significant impact on the US economy, but strong companies can still grow earnings—and may even enjoy some advantages in the evolving environment. Nearly 80% of Russell 2000 constituent revenues are generated in the US, according to Barron’s, giving small businesses greater protection from the negative effects of tariffs relative to larger-company stocks with more global exposure.
To be sure, smaller businesses are concerned about trade uncertainty, as reflected in a recent decline in the National Federation of Independent Business (NFIB) Small Business Optimism Index. Nonetheless, business optimism remains higher than it has been in the last three years (Display).
