COTW: Smaller Companies Continue to Lag Market Recovery

COTW: Smaller Companies Continue to Lag Market Recovery

The COVID-19 pandemic has created an economic environment of disparity between winners and losers.

Relative to their long-term earnings, U.S. small cap stocks (Russell 2000 Index) have seen multiples compress drastically.  This is a trend that began in 2018 after the escalation of the trade war between the U.S. and China.  Smaller companies, which are domestic by nature, did not have the supply chain flexibility to mitigate tariff impacts.

In contrast, U.S. large cap stocks (S&P 500 Index) have seen multiples expand due to their respective competitive positions, financial strength and investor sentiment surrounding the current challenges being faced by the U.S. economy.

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