Analysts say inflationary impact of tariffs could derail small-cap recovery
Analysts see increasingly little hope for small-cap stocks. / Photo: Unsplash/Nicholas Cappello
Rising inflation driven by U.S. tariffs could diminish any hopes of a small cap resurgence, analysts surveyed by Portfolio Adviser warn. Small-cap equities have struggled to attract investment in recent years, but after the 2024 election, there was renewed optimism. Now, that hope is fading.
Details
Widening tariffs threaten to cause a new bout of inflation in the U.S. economy, complicating the recovery of small-cap stocks, according to analysts cited by Portfolio Adviser.
A proposed 10% tariff on a wide range of goods could add 0.3 percentage points to core inflation, which stood at 3.1% year-over-year in February, estimates Laura Cooper, a global investment strategist at asset manager Nuveen. In late 2024, she had favored small caps, but now she has put them on “pause.” Cooper believes higher inflation will hit smaller firms especially hard, as they lack the financial cushion of their larger peers.
Small-cap companies are highly dependent on U.S. economic growth and liquidity cycles, agrees Tara Fitzpatrick, manager of the Schroder Global Multi-Asset range. She told Portfolio Adviser that she cautiously added small caps to her portfolio after Donald Trump’s reelection in November, holding the position for just a month. Fitzpatrick called it a short-term tactical bet driven by sentiment rather than a long-term reallocation to the asset class.
What other analysts say
Analysts are growing increasingly cautious toward small-cap stocks.
Small caps — one of the riskiest segments of the stock market — are signaling a potential slowdown in U.S. business activity, Bloomberg reported last week, citing BoA analysts.
CFRA’s chief investment strategist, Sam Stovall, argues small caps are like the canary in the coal mine for economic health. “Right now the canary is coughing and soon might keel over. This higher-volatility group is likely to surrender its gains more quickly than large caps in the face of a recession,” he told Bloomberg.
Investing in small-cap stocks is risky, BofA strategist Jill Carey Hall previously warned. She notes that one key challenge for small companies is persistently high interest rates with widening credit spreads. In 2024, the Fed cut rates three times but paused in January and March this year to bring inflation down.