📉 Are Small-Cap Stocks Bracing for More Pain?

Small-cap stocks, particularly those in the Russell 2000, are facing significant challenges as interest rates remain elevated. The landscape has shifted dramatically since the Federal Reserve began hiking rates in March 2022, and the impact on these companies is becoming increasingly apparent.

Key Insights:

- Interest Expense Surge:

🏦 Interest expense as a percentage of total debt in Russell 2000 companies has hit 7%, the highest level since 2004.

- Rate Hike Impact:

🚀 This percentage has surged since 2022, as the Fed raised interest rates from near zero in March 2022 to 5.5%.

- Vulnerability to Rate Changes:

📉 Approximately 41% of these firms have a floating debt profile, making them highly sensitive to changes in interest rates.

- Debt Burden:

💸 Russell 2000 companies now carry **$832 billion** of debt on their balance sheets, creating a significant burden on profitability.

- Underperformance:

📊 As a result, the Russell 2000 index has substantially underperformed major stock indices over the last 2 years and is still 15% below its 2021 all-time high.

Conclusion: Small-cap stocks are in dire need of lower interest rates to ease their financial burdens and improve profitability. Until then, these companies may continue to face headwinds, contributing to the ongoing underperformance of the Russell 2000.