US equitiesSmall and midsize US stocks are struggling under the strain of high interest rates, as the Federal Reserve’s pledge to hold borrowing costs higher for longer threatens the weaker balance sheets of smaller companies.
The underperformance highlights how smaller stocks are acutely feeling the effects of the Fed’s rate increases, at a time when some market watchers are questioning whether the transmission of interest rates to the economy has been blunted. “This is new, uncharted territory for small caps,” said Ed Clissold, Ned Davis’s US strategist, adding that smaller companies face the prospect of either rates staying high or the economy heading into recession.
Crucially, 30 per cent of Russell 2000 companies’ debt stock is floating-rate, exposing them to a rising rate environment. That is in contrast to 6 per cent for the S&P 500, according to Goldman Sachs.