Shares of smaller U.S. companies are outpacing a rally in the broader equity market as they draw investors looking to scoop up cheaply valued stocks and those betting the group has already priced in an economic slowdown.
Small caps tend to be more domestically oriented, less profitable and carry a heavier debt load than their larger counterparts, often putting them in the firing line when worries over the economy take hold and markets become volatile.This year was no exception: the Russell 2000 has fallen 16% in 2022 despite July's rebound, compared with the S&P 500’s 13.
Some investors also believe that prices for small caps - which are viewed as more attuned to the economy’s fluctuations - may already be reflecting a potential recession, limiting their downside if predictions of one come to pass. Citi U.S. equity strategists earlier this week wrote “stocks down the market cap spectrum appear closer to pricing in recession than their Large Cap peers."
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