02.10.20 - The US economy continues to surge, according to the data. Job growth is the strongest it’s been in recent memory, wages are rising, the housing market seems robust and healthy, and the service sector seems to be in the midst of a boom. Given these strong numbers on the domestic economy, it seems reasonable to ask ourselves why small American companies that do most of their business domestically seem to continue to struggle.
As concerns over trade, Brexit, and the coronavirus outbreak continue to shake up multinational firms, some might argue that it’s time for smaller American companies to get their chance to shine. The question ultimately is whether investors might seek to readjust their attention to smaller, domestically focused companies. If the global economy slows down, investors might start looking for companies that can post stronger gains earnings over the next couple of years. That should favor smaller, more nimble US stocks.
However, investors seem willing to stomach poor financial performances from larger firms. About 75% of large-cap stocks that reported losses in the past year also posted an increase in their share price. This sort of makes sense. Institutional investors may be more lenient towards short-term losses from companies they’re familiar with and whose products they use. It's common for larger firms, particularly tech companies, to be in the red when they are in expansion mode.
Small US companies face another obstacle as they try to keep pace. Trade disputes may actually damage them, regardless of whether they are producing goods to be sold overseas or not. Tariffs on materials such as steel and aluminum raises manufacturing expenses, and larger companies are in a much better position to absorb those rising costs without passing the buck to the consumer. This is not the case for smaller, domestic firms.
