Small and medium-sized American businesses suffered a complete wiping out of their profits in the second quarter due to the Covid-19 crisis, unlike large multinationals which emerged in better shape from the most intense phase of the pandemic.
As the earnings season draws to a close, companies on the Russell 2000 Stock Index – the benchmark small-cap index – reported a total loss of $ 1.1 billion, against profits of nearly 18 billion. billion dollars a year earlier, according to data provider FactSet. Meanwhile, the much larger companies in the benchmark S&P 500 posted an overall drop of 34% in profits, to $ 233 billion.
Investors said the numbers highlight a divide between small businesses that have been crushed by the Covid-induced recession and large companies that “have the strength to overcome anything thrown at them,” said Margie Patel, manager of senior portfolio at Wells. Fargo Asset Management.
“Small businesses don’t have the resources,” she added. “They don’t have deep financial pockets.”
The spread is reflected in the returns of the two main indices. The S&P 500 – which fell more than 30 percent on the Covid-19 sale – is now 3.2 percent above the starting point of the year. The Russell 2000, on the other hand, is still 5.6% lower year-to-date.
The discrepancy reflects the market’s “apprehension” that small companies might find it difficult to stay in business, said Ralph Bassett, head of North American equities at Aberdeen Standard Investments.
Lockdowns and social distancing measures aimed at curbing the spread of the deadly coronavirus pandemic pushed the United States into its biggest post-war contraction between April and June. Bankruptcy filings have skyrocketed and more than 16 million Americans continue to collect unemployment benefits, with many job losses becoming permanent.
“The shock to economic growth has had a particularly pronounced impact on small businesses,” said David Kostin, strategist at Goldman Sachs. Stronger balance sheets and higher profit margins have helped “isolate” the profits of large companies, he added.
While large groups were able to quickly raise the necessary liquidity from mid-March, small businesses struggled to recover from the situation. Many have turned to government programs. However, with the expiration of the stimulus measures, many small businesses are once again in need of capital.
“Small-cap companies don’t have as much liquidity and they don’t have the flexibility to cut costs as much, especially during times when there was no revenue,” said Liz Young, director of market strategy. at BNY Mellon Investment Management. “These are the businesses that will need help in this crisis.”
According to Craig Burelle, an analyst at asset manager Loomis Sayles, smaller groups were operating with “extremely slim profit margins” even before the pandemic. About a third of the groups within the Russell 2000 did not make a profit until the crisis hit this year, and the index itself was “heavily exposed to cyclical sectors which tend to experience the most fundamental deterioration. in the event of an economic downturn, ”he said.
The benchmark small-cap index has a strong focus on healthcare – including loss-making biotech groups – as well as financials, clothing companies and industrials. Goodyear Tire & Rubber of Akron, Ohio, one of the largest constituents, was a good example of a business hard hit, reporting a 41% collapse in sales and a quarterly loss of $ 696 million, against profit of $ 54 million a year earlier.
The difference in wealth is partly explained by the lower proportion of technology companies in the small cap index. While tech stocks now make up around 27% of the S&P 500, they make up just under 14% of the Russell 2000 groups.
Profits generated by Apple, Microsoft, Amazon, Alphabet and Facebook – the five large-cap technology companies that dominate the blue-chip benchmark – rose 2% collectively in the quarter, according to Goldman Sachs. Amazon saw a 40% increase in revenue, with stranded consumers turning to the company for groceries and other products.
Analysts’ forecasts remain pessimistic for the rest of the year, even if they start to increase. FactSet now expects S&P 500 earnings to be down 23 percent year-over-year in the third quarter, compared to a previous estimate of a 26 percent decline.
But investor confidence in another round of fiscal stimulus, which has been key to supporting consumer spending during the crisis, has weakened as Republicans and Democrats remain at odds on what the package should contain. This is making policy makers worried about whether the widespread resurgence in US stocks – the S&P 500 is very close to its all-time high – can be sustained.
“It appears that the massive policy response, both fiscal and monetary, matters more to the market than the trajectory of earnings growth,” said David Kelly, chief global market strategist at JPMorgan Asset Management. “However, over the long term, stocks tend to follow earnings and. . . at some point, these high values will have to be reconciled. “