Small-cap stocks have officially entered a market correction defined as a decline of 10% from recent highs.
As U.S. equities continue to decline, the Russell 2000 index of small-cap stocks fell 0.3% on Feb. 24, bringing its decline to 10.3% from a record close of 2,442.03 last November.
Small cap stocks briefly soared following Donald Trump’s re-election last autumn, with the Russell 2000 climbing to an all-time high.
Trump’s deregulation and America First agenda were expected to boost sales and lower expenses for smaller companies, sending stocks of companies with market capitalizations below $10 billion U.S. soaring.
However, that bullish sentiment has been replaced by uncertainty around trade tariffs, a slowing U.S. economy, and rising inflation.
Also weighing on small-cap stocks has been mixed fourth-quarter 2024 financial results. Profits from small-cap stocks have been flat year-over-year, according to %BankofAmerica (NYSE: $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 organizations.
Another headwind is inflation, with consumer prices rising for a fourth consecutive month in January of this year, suggesting progress on lowering inflation has stalled.
Analysts and investors have lowered their expectations for further interest rate cuts this year, and some are even expecting rates to rise in coming months.
While other U.S. indices such as the blue-chip Dow Jones Industrial Average and technology-laden Nasdaq Composite have declined over the past month, they have not fallen into correction territory as the Russell 2000 has.
The benchmark S&P 500 index has increased 2% so far in 2025.
COMTEX_463098963/2797/2025-02-25T10:21:02