By coinnews 
00:00 Speaker A
Walk us through why you think mid-caps still preferable to small caps here.
00:08 Jill
Thanks for having me. Yeah, I mean, I think we’ve, we’ve obviously seen a bounce in, in the Russell 2000, but when you step back, I mean, the, the tariff agreement between the US and China is certainly a positive, but even before tariffs were in play, we were cautious in the Russell 2000 small cap index because, you know, these stocks have still been struggling to get out of the earnings recession that they’ve been in since 2023. Um, tariffs, while there is less incremental risk are, are still in play and, and there’s still a lot of uncertainty and, and obviously there is still a 30% uh, tariff rate in, in terms of China. So smaller companies have thinner margins, so they will get hit harder in terms of the earnings impact from tariffs. Um, so when you’re within that, that mid-cap size segment, mid-caps are, you know, less impacted by, by tariff risk. We’ve also seen, you know, cleaner balance sheets in the mid-cap size segment. If we’re in an environment where the, the Fed stays on hold, which is what our economists are expecting for this year, um, smaller stocks have a lot more refinancing risk. So, uh, we, we’ve also seen trends this earning season where, you know, corporate sentiment on earnings calls has still been much more negative for, for smaller stocks. So we do think mid-caps offer a, a better risk reward. Um, but, but I think we’re in an environment where selectivity is key, you know, just buying or selling the Russell 2000 isn’t uh, maybe the best way to, to invest. We think there’s still a lot of opportunities within small and mid-caps, um, you know, on, on a selective basis given where valuations are, um, but, but focusing on the stocks that, you know, maybe have stronger margins given tariff risk, maybe that have stronger estimate revisions in an environment where estimates have coming, been coming down. These are the areas we focus on.
04:25 Speaker A
Um, and Jill, um, it’s interesting that, that as we get these changing tariff rates, you guys have to redo your numbers on the effect that it’s going to have on earnings per share. So where do you stand now and compare and contrast what it’s going to mean for S&P 500 earnings per share versus the smaller caps?
05:02 Jill
Yeah, so if we, if we look at the, the latest agreement and the, the 30% on, on China and, and the, the 10% uh, in terms of the reverse, then, you know, we, we think for the S&P 500, there should be about a five to 6% hit to operating earnings. Um, so much less than, than prior to the agreement. Um, whereas for, for small caps, we, we think the impact could be, you know, about three times as much, given that these stocks do have thinner margins. So it is harder for them in, in terms of the tariff impact. And a lot of small caps are, you know, less, less nimble than, than some larger companies to be able to as easily, you know, shift, um, supply chains and sourcing.