Small-cap companies have a higher share of floating rate debt, see the first chart. Specifically, floating rate debt as a share of total outstanding debt for the Russell 2000 is 51%. For the S&P 500, the share is 25%.
Put differently, small-cap companies are more vulnerable to Fed hikes and rates staying higher for longer.
Even after the Fed turned dovish in December 2023 and rates started coming down and credit spreads started tightening, small-cap earnings have shown no signs of a rebound, see the second chart.
This confirms the extreme concentration in the stock market. Small-cap earnings expectations remain weak even in a strong economy with yield levels coming down. The likely reason is that 41% of companies in the Russell 2000 have negative earnings, i.e., very poor credit fundamentals, see the third chart.
If we get a soft landing with inflation coming down and the Fed cutting rates, then earnings expectations should begin to rise for both small-cap and large-cap stocks. But this is not what we are seeing.
Source: Bloomberg, Apollo Chief Economist. Note: Data as of July 2024, using SRCH function on Bloomberg and includes corporate bonds and loan (tranches) and excludes financials.Source: Bloomberg, Apollo Chief EconomistSource: Bloomberg, Apollo Chief Economist
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