There are many risks for small caps. Trump president, investors fear
In the first part of the year, the intense movement of the mega large American tech stocks generated more than half of the performance of the S&P500. A stronger-than-expected slowdown in June inflation is raising expectations for a Fed rate cut, adding to the number of rising stocks that are pushing U.S. stocks to new records.
The Strong interest in artificial intelligence-related stocks has contributed to the rally in the US stock market. The weight of technology is approaching the fateful 35%, reached during the TMT bubble of 2000. However, the situation is completely different, the current movement has been driven by strong earnings growth, solid results and equally exceptional expectations. Looking ahead, however, the upward movement would need a sector rotation or at least a significant increase in the breadth of the stocks under the spotlight. Corporate earnings publications have just begun. In the second quarter, earnings growth of 9.3% annualized is expected for companies in the S&P 500, which would represent the best figure since the beginning of 2022. Taking into account that actual earnings tend to be higher than forecasts, the research firm FacSet estimates that the result could be equal to or higher than 12%. Concerns that a slowdown in the economy could lead to a reduction in expectations for corporate earnings do not seem to concern analysts, who have not cut their estimates for the second quarter more than usual.
From March 31 to June 30, the reduction was only 0.5%, well below the average of the last five years. In addition, expectations continued to improve for the full year, which increased to 11.3% and to over 14% for 2025. After the flare-up at the beginning of the year, the trend of inflation coming back confirmed by the June data, which increased optimism about a more accommodating monetary policy by the Fed, has awakened small caps. Just last Wednesday, we had the largest daily performance difference between the Russell 2000 and the Nasdaq, equal to 5.5%, which continued in the following sessions. Small caps had attractive valuations in relative terms but were unable to create the conditions for their outperformance. The prospect of lower interest rates and a soft landing scenario attracted investors’ attention. In the medium term, however, the potential election of Trump could be a problem for the segment. The introduction of new trade tariffs and tax cuts would reignite inflation, provoking a reaction from the Fed and negatively impacting the prospects of small caps.
* Head of Multi Asset Team of GAM (Italy) SGR
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