00:00 Speaker A
Talk to me about what it’s going to take for small caps to outperform again, especially given not only the tariff uncertainty but the macro uncertainty that that’s causing as well.
00:17 Speaker B
Yeah, well, there’s there’s two things I’m really watching. One is the Fed and one is our fundamentals for companies, right? So fundamental growth for Russell 2000 companies has to be stronger than the S&P 500 just to start for small caps to outperform. We haven’t really seen that since 2018, 2019 and and the 2021 recovery period after the 2020 recession. So we really need to see fundamental growth pick up. Now, we started to see some of that in the first quarter, but a lot of the revenue growth that we saw in the Russell 2000 might have been pulled forward from this tariff hit, right? So if you think about what company, how companies are going to brace for tariffs, they’re going to buy products in advance of the tariffs hitting, trying to get ahead of of some of those tax consequences and and build up inventories. So the question is going into the second quarter earnings, was that a buildup or was that actually organic growth and we’ll we’ll see more as as we get more results.
02:11 Speaker A
Yeah, and Mike, I hear you talking about something that we talk about so often with our sources that it’s just really hard to tell with regards to tariff policy that is constantly changing and also whether it’s a pull forward dynamic or indicative of something else given the uncertainty that tariffs create. Uh for small and mid-cap companies, should investors be looking at specific stocks more so than the broader index in this environment? And if so, what’s the best way to do that?
03:08 Speaker B
Yeah, so if you’re talking about specific stocks and sectors, I I tend to focus a little bit more on sectors. Um, across the board, both in in mid caps and small caps and even in large caps, tech is the most foreign exposed sector across all of these three industries. The S&P 500 and the Russell Mid and the Russell Small, right? So tech is one that that can be very badly hit, right? Now we’ve had some reprieve on the tariff front for tech specifically, you know, Trump’s gone back and forth, uh, whether there’s going to be tariffs on semis and he’s pulled it back and he said it’s going to come at a later date. So there’s a lot of uncertainty around that, but if there are specific tariffs on tech products, it it it would be pretty disastrous for the sector. Now, in terms of smaller midcap companies specifically, they do have less foreign exposure significantly than large caps, right? So when we’re talking about cost of goods exposure for midcap companies, we’re talking about 40% of the index has cost of goods exposure outside the US. That’s in contrast to nearly 50% for the S&P 500 and it gets even smaller as you go to the Russell 2000. And when we’re talking about revenue, so reciprocal tariffs, you know, tariffs China might put on the US and so so on and so forth. Um, smaller midcap companies are only about 20% revenue exposed to foreign entities, whereas the S&P 500 is about a third exposed. So there is significantly less exposure down cap whether that translates to fundamentals is yet to be seen.
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