Small-cap recap/preview: Disappointing earnings, recession fears ease, coms lag

The main small-cap index, the Russell 2000, extended its streak of positive weeks last week. Overall, however, earnings season has been a disappointment for investors. Here’s our recap of what happened in the small-cap space last week, May 5-9, and preview of what to expect this week.

Last week, the Russell 2000 gained just 0.12%, but that nevertheless meant a fifth consecutive week of growth. For comparison, the S&P 500 fell 0.47% last week. As Freedom Broker notes, small caps were led by commodities and materials, IT, industrials, energy, and consumer durables. These are cyclical sectors that tend to rise and fall with the broader economy. Investors responded positively to last week’s economic data, which eased concerns about a potential recession, Freedom Broker points out.

So far, 87% of the S&P 600 SmallCap index constituents have reported first-quarter earnings. According to Freedom Broker, the season has been disappointing overall.

Combined EPS for the companies that have reported so far fell 9.2% year over year, whereas the consensus forecast had been for an increase of 2.4%. The communications sector has been the biggest underperformer, with aggregate EPS plunging 142% year over year. Consumer staples has been a bright spot, with aggregate EPS growing 45.2%. Top performers in that group included Cal-Maine Foods, Fresh Del Monte Produce, and Simply Good Foods, according to note put out by Freedom Broker.

Porch Group, which helps home professionals to find jobs and improve their business through B2B and B2C software and services, saw its shares soar 61.6% over the week, closing at $10.31 per share on Friday, May 9. The rally followed strong first-quarter financials: Revenue reached $104.7 million, about 25% above the consensus forecast. The company also raised its full-year guidance, now expecting 2025 revenue of $400-420 million (up from $390-410 million previously) and adjusted EBITDA of $60-70 million (versus $55-65 million before).

Last week’s worst performer was investment firm Compass Diversified. The company announced that its 2024 financial statements were unreliable and disclosed an internal investigation into its subsidiary, Lugano Holding. The issues involve “irregularities in sales, cost of sales, inventory, and accounts receivable,” as well as “unrecorded financing arrangements.” Although the investigation and violations are not directly linked to Compass Diversified itself, the company’s audit committee decided to restate its 2024 financial results. Compass also postponed its first-quarter earnings.

On Thursday, the day after the announcement, shares plunged 62%. For the week, they fell 60.6%, closing at $6.96 apiece on Friday.

Freedom Broker analysts expect increased volatility in small-cap stocks tomorrow, May 13, when U.S. inflation data, a key metric for the space, will be released.

Earnings season will also wrap up this week, with 14 S&P 600 SmallCap companies and 149 Russell 2000 companies scheduled to report.

Freedom Broker recommends investors keep an eye on the following small-cap names: