Small-cap stocks have fallen into a market correction defined as a decline of 10% from recent highs.
With U.S. equities continuing to slump, the Russell 2000 index of small-cap stocks has fallen 10.3% from a record close of 2,442.03 reached last November. Small-cap stocks briefly soared following Donald Trump’s re-election last autumn, with the Russell 2000 hitting an all-time high.
Trump’s deregulation and America First policies were expected to boost sales and lower expenses for smaller companies, sending stocks with market capitalizations below $10 billion upwards. However, that bullish sentiment has been replaced by uncertainty around trade tariffs, a slowing U.S. economy, and rising inflation.
Consequently, leading small-cap stocks such as clothing retailer Abercrombie & Fitch (ANF), grocery store chain Sprouts Farmers Market (SFM), and home heating and air conditioner installer Comfort Systems USA (FIX) have each seen their share prices drop more than 10% in the last month.
Mounting Problems
Also weighing on small-cap stocks has been mixed fourth-quarter 2024 financial results. Profits from small-cap stocks have been largely flat year-over-year, according to an analysis by Bank of America (BAC). This combination of factors has led investor sentiment to turn bearish on small-cap stocks.
Trump’s trade protectionism is expected to further erode the earnings of small-cap companies and encourage the U.S. Federal Reserve to keep interest rates elevated going forward. High interest rates are a headwind for small caps as they tend to carry more floating-rate debt than larger corporations.
Another headwind is inflation, with consumer prices rising for a fourth consecutive month in January of this year. Many analysts and economists have lowered their expectations for further interest rate cuts this year, with some even forecasting that rates will rise in coming months.
Is the iShares Russell 2000 ETF a Buy?
The iShares Russell 2000 exchange-traded fund (IWM), which tracks the leading small-cap stock index, has a consensus Moderate Buy rating among 1,947 Wall Street analysts. That rating is based on 1,219 Buy, 663 Hold, and 65 Sell recommendations issued in the past three months. The average IWM price target of $283.05 implies 31.86% upside from current levels.
