Barron’s: Small caps are biggest winners from U.S.-China tariff truce

Small caps have gained more than their peers on the news of the recent agreement between the U.S. and China to ease trade tensions and “can rally a whole lot more,” writes Barron’s reporter Jacob Sonenshine. On the day the news broke, yesterday, May 12, small-cap indexes like the Russell 2000 and the S&P SmallCap 600 outperformed the S&P 500.

The Russell 2000 rose 3.42% yesterday, while the S&P SmallCap 600 gained even more, adding 3.67%. By comparison, the S&P 500, which tracks the largest U.S. companies, climbed 3.26%.

Yesterday, the U.S. and China agreed to roll back for 90 days most of the tariffs recently slapped on each other’s goods. This helped ease recession fears and triggered a rally, Barron’s writes. Note that shifts in market sentiment are magnified in the small-cap space. When the market expects broad earnings growth, small caps often outperform large caps.

After U.S. President Trump announced his sweeping tariff plan on April 2, stocks plunged: On April 3 alone, the S&P 500 fell 5%, while the Russell 2000 and S&P SmallCap 600 each dropped about 7%. The recent truce with Beijing has helped recoup most of these losses.

According to the Bloomberg consensus for the S&P SmallCap 600, EPS growth is expected to outpace that of large caps companies in the second half of this year for the first time since late 2022, Barron’s reported in late April.

The selloff in small caps made them so cheap that any positive economic news would likely spur a rebound, Barron’s noted. “Small-caps are ‘vulnerable’ to upside at the slightest of positive headlines,” pointed out Evercore strategist Julian Emanuel.