The future of small publicly listed US companies and their shares have been falling in recent years. However, their fall became more significant this year, because of the trade tensions brewing between the US and China. The small listed companies may have to prepare for a rough year ahead, especially if economic growth doesn’t improve. More giant corporations, on the one hand, remain secured in their seats, unlike the smaller companies.
Hard Impact on Smaller Companies
Wall Street’s forecast has been optimistic for the next half of 2019, and its report shows there will be growth for the S&P 600 index for small capital stocks. However, the forecast is threatened by the impending and intense battle between the US and China rift, both countries having one of the biggest economies around the world. The rift is casting some serious doubt on the future of small caps trading.
Many investors remain hopeful that small caps might not be as vulnerable as more prominent companies in this trade way. Considering how small caps rely less on overseas sale, the trade war won’t have much effect on them. However, if the tariff boost would increase prices on imports, then it can potentially slow down the economic growth of the US. This will be problematic for small caps who owns less financial cushions compared to multinational companies. But because many US companies rely on their suppliers overseas, the problem might become a reality and importing goods could become expensive.
Jill Carey Hall, a U.S. strategist at Bank of America Merrill Lynch, in a statement, says “Because they have more domestic sales it doesn’t mean they’re insulated. If we don’t get a resolution on trade, you don’t necessarily want to own small caps. They tend to fare more poorly in risk-off environments.”
Increasing Tariff on Imports
Donald Trump, U.S. President, tweeted last May 5 about potentially increasing traffic on 200 billion worth of Chinese goods. From 10%, he plans to raise it to 25%. Unfortunately, companies who rely on imports for their inventory had no chance to prepare for the impending tariff hike, which started on May 10. If the US decides to put 25% more on tariffs over goods being sold by the Chinese, it will cause more pressure for several companies.
Wall Street also reports a decline on small-cap stocks. Jeffries, an equity strategist of DeSanctis, made a statement on the results of the first quarter “This will be the worst reporting season for small caps since 2009.” However, some forecasters are hopeful that on the third quarter there will be an EPS growth.
Consumer Spending Saves the Day
DeSanctis says “For small caps to pick up and resume their outperformance we need to see better trends in the economic data in the second half, which would lead to better earnings growth in the third and fourth quarter, which the Street is expecting.” However, many are betting against the odds and believe the US economy will weaken, and its growth may be slow. “There’s a higher probability today that things aren’t going to get better in the second half,” DeSanctis adds.
The only the US needs to work on is to increase its consumer spending and keep it active. DeSanctis believes that having strong consumer spending offsets the weakness present in capital spending because of the unpredictable environment of international trade. DeSanctis further adds that “That’s important people do have money in their pocket to spend. If costs are going to start to escalate, people are going to be far more concerned about their spending patterns.”