Some signs of the US economy’s trajectory, including consumer sentiment It’s falling sharply to its lowest level in two yearsUS stocks Sinking And President Trump’s foreign trade policy has been moving downwards, creating an environment of uncertainty for American businesses. There is also another, uninterested index that shows signs of trouble earlier.
The Russell 2000, a stock index made up of small and medium-sized businesses, has fallen more than 18% since its peak in November when Trump was elected. The index initially rose with optimism that the new administration would create a more business-friendly environment, but that sentiment changed during an escalating trade war with some of the US’s closest allies. Large federal layoffs launched by the Government Efficiency or DOGE Bureau also create significant uncertainty for businesses.
Currently, the Small-Cap index is heading towards the bear market, defined by a decline of more than 20% from the latest highest.
“Some small caps, like the Russell 2000, outperformed the S&P 500 after the election. Perhaps they are based on the theory that substantial trading activities will take place, as these companies are more likely to acquire and merge than the largest of the larger companies.”
“There was a sense that deregulation and the environment for transactions to occur would be easier, but now there is a huge uncertainty hanging in the economy and markets where transactions are really difficult to happen,” explained Hornung.
In addition to the broad tariffs in Mexico, Canada and China, the collection of 25% on steel and aluminum threatens to raise costs for both businesses and consumers. Small businesses with strict profit margins struggle to absorb input costs compared to larger companies.
Canary in the coal mine
The Russell 2000 is made up of small and medium-sized businesses in various sectors and is widely considered to be a benchmark for small stocks in the US. Unlike the Tech Heavy S&P 500, it is not weighted to a particular industry.
Small businesses operate at thinner margins and are usually more exposed to the market than larger companies, and indexes become more sensitive to economic changes.
“It is more diverse at the sector level, which means it represents the growth dynamics of the US,” Macroeconomist and Executive Director of Executive America, Skanda Amarnath, told CBS Money Watch.
Russell 2000 companies include commercial jet engine company FTAI Airlines, grocery chain Sprout Farmers Market, a plant-based food company beyond meat, and language learning tool Duolingo.
It does not refer to a recession
The Russell 2000 is just two percentage points away from entering Bear Market territory, but research economists at Bank of America say it’s not a recession price and hopes the economy will grow this year.
“Historically, during the recession, the Russell 2000 sold out on average nearly 40%,” said Jill Carey Hall, head of small and intermediate strategies for Bank of America’s research. “Therefore, there is no pricing at this point, with a chance that there is more than 50% of the recession.”
Still, small businesses can face significant profit margin erosion due to tariffs in place.
Assuming retaliatory tariffs based on the taxes currently in place in Canada, Mexico and China, Bank of America estimates that revenue hits could be three times greater than the big cap.
“The margins are much thinner for these companies, so the higher input costs hurts them more,” Carry Hall said.
