Bloomberg Podcasts · Small Caps Track Largest S&P 500 Lead Since 2003

1. 1. Small caps have underperformed for over a decade, but now have cyclical positives: coming out of an earnings recession and a manufacturing recovery.
2. 2. The ISM manufacturing indicator is the single most correlated macro indicator with the Russell 2000, more so than other 30-50 indicators.
3. 3. Higher oil prices benefit the Russell 2000 because it has more exposure to industries that benefit from higher oil than to consumer industries hurt by it.
4. 4. Performance within the Russell 2000 this year has been concentrated in thematic infrastructure stocks, leaving other parts like healthcare still lagging.
5. 5. About a third of Russell 2000 companies are non-profitable, historically elevated due to two earnings recessions and the 2021 IPO boom.
6. 6. Low-quality stocks outperformed within small caps over the past year, a three-standard-deviation event, but the environment may now favor higher-quality names.
7. 7. In the second half, mid caps are preferred over small caps because they offer similar profit growth but with less performance already realized and lower rate sensitivity.
8. 8. The Fed is expected to hike three times this year, which poses more risk to small caps due to their higher leverage and short-term floating-rate debt.
9. 9. M&A activity is dominated by large companies acquiring small caps, particularly large pharma buying smaller biotech, where valuations are cheaper.