BofA reports the worst small-cap executive sentiment in 20 years

Sentiment among executives of smaller companies is at its lowest since 2004, according to a BoA report cited by Bloomberg. Meanwhile, small-cap stocks have come far off their post-election highs as hopes tied to the administration of Donald Trump and for continued Fed easing have faded.

Small-cap executives are gloomier than they have been in 20 years, according to a BoA analysis examining transcripts of earnings calls this season. While smaller companies posted healthy earnings in the fourth quarter, most are now lowering their forecasts for 2025. 

The market has mirrored this pessimism. The small- and mid-cap Russell 2000 index has tumbled nearly 11% from its post-election high on November 25.

The initial rally was driven by “hope alone following the election, with a loose narrative that ‘pro business’ policies would particularly help smaller companies,” Cameron Dawson, CIO of Newedge Wealth, told Bloomberg. In particular, expected higher tariffs were seen as boosting demand for goods and services offered by U.S. small businesses. However, Bloomberg writes that smaller companies, including automakers, could be a victim of trade wars, too.

Investors also anticipated more easing by the Fed. While the Fed cut rates three times in 2024, it took a pause in January. In February, Fed Chair Jerome Powell warned Congress that “reducing policy restraint too fast or too much could hinder progress on inflation.”

Economic and policy uncertainty, coupled with the “harsh reality” of higher-for-longer interest rates that weigh on corporate balance sheets, has weighed on small caps, Dawson of Newedge Wealth says.

Smaller firms are particularly vulnerable due to their higher reliance on short-term and floating-rate debt, notes Keith Lerner, co-CIO at Truist Advisory Services, as quoted by Bloomberg. Lerner recently downgraded his outlook on small-cap stocks.

Sentiment is mixed, writes BofA strategist Jill Carey Hall. On the one hand, investors fear missing out on a small-cap rebound; on the other hand, they are worried about the “death of small caps.”

Meanwhile, options traders appear to be positioning for further market losses. Bloomberg reports that demand for put options to protect against a 10% decline in the iShares Russell 2000 ETF next month is the highest since late December.