The situation with US small caps remains fragile
To take the pulse of the US financial markets and look for information on expectations for the US economy, it is interesting to examine the performance of shares in small capitalisation companies, otherwise known as ‘small caps’.
Due to their structure, small caps are highly sensitive to the various phases of the economic cycle and to monetary policy decisions. Typically, small caps tend to outperform the general index and large-cap stocks during the initial phases of economic expansion, while underperforming during periods of uncertainty, high interest rates or impending recession. Their position relative to the overall US stock market is a good indicator of market sentiment.
So let’s examine how US small caps have performed over the last year.
The first chart shows the relative strength ratio between the Russell 2000 index, which represents small caps, and the Russell 3000 index, which represents the entire US equity market. The trend is as expected. The euphoric phase at the end of 2024 strengthened small caps, while increasing uncertainty from January onwards had the opposite effect. We observe the downward crossing of the 50-day and 200-day averages towards the end of 2024, followed by a prolonged decline until the end of April. A comeback attempt has been underway since then, but it is still too early to speak of a real recovery.
The relative strength ratio between small-cap stocks (Russell 2000) and large- and mid-cap stocks (Russell 1000) shows the same pattern.
The charts suggest that the situation for small-cap companies remains fragile, but the evolution of well-known geopolitical events and the resumption of the Fed’s expansionary cycle could favour a recovery.
