NEW YORK: Last week's announcement of more U.S. tariffs on Chinese goods may have undermined the prospects for small-cap stocks to rebound this year, even after a brief respite from the Federal Reserve's recent interest-rate cut. Just a day after the Fed cut interest rates for the first time in more than a decade, President Donald Trump vowed on Aug. 1 to impose 10per cent tariffs on an additional US$300 billion of Chinese goods beginning on Sept. 1.
Moreover, he wrote,"about two-thirds of goods tariffed in this round are consumer goods, which could lead to a more pronounced impact on the U.S. as compared to earlier tranches." "Small caps looked like they were about to break out," he said."But as soon as tweet came out, they broke down." In particular, recent developments on tariffs have brought small-cap companies' shrinking profit margins back into focus, an issue that has dragged down their shares over the past year.
Furthermore, profit margin projections have fallen for small-cap companies more sharply than for large-cap companies since the end of June, according to research from Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. Added costs from tariffs would further depress small-cap earnings."There's definitely a margin issue if costs rise and they can't pass them on to consumers," DeSanctis said.
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