EXCLUSIVE: Small-Cap Stocks Stumble As Market Concentration Looms, Warns Russell's Eitelman

Several factors could hinder small-cap performance, according to Paul Eitelman, Chief Investment Strategist for North America at Russell Investments.

Eitelman recently shared with Benzinga his key insights on small-cap stocks and equity performance, tracked by the Russell 2000 Index.

Read Also: EXCLUSIVE: Small Caps At ‘Most Attractive Relative Valuations’ Since 1990s, Says Russell Investments’ Paul Eitelman

Narrow Market Leadership – A Key Risk

Eitelman noted, "Extreme market concentration and narrow market leadership remain a key risk for the relative performance of small-cap stocks in the near-term."

This refers to the outsized influence of mega-cap stocks like the ‘Magnificent 7‘ in driving market returns. As long as market leadership remains this narrow, small-cap stocks are unlikely to keep pace, especially if these tech giants continue to dominate investor capital.

Macroeconomic Vulnerabilities

Eitelman also highlighted macroeconomic risks. “While we think a U.S. recession can be avoided in the year ahead, an economic downturn would likely cause small-cap stocks to underperform."

Small-cap companies are typically more vulnerable during recessions because of their weaker balance sheets and higher sensitivity to the business cycle. A sudden economic shock could exacerbate these vulnerabilities, causing underperformance in the small-cap space.

Inflation Impacts Small-Cap Stocks

Another critical risk is inflation. Eitelman explained, "Stickier U.S. inflation data would also be a challenge for small-cap stocks, given many of these companies are more indebted with shorter- and variable-rate financing." Rising borrowing costs could strain these companies further, making them more susceptible to financial stress.

Eitelman's analysis underscores the importance of cautious positioning within small caps, as the sector faces both macroeconomic and market concentration risks that could limit upside potential in 2024.

Price Action: popular funds tracking the Russell 2000 index include: 

• iShares Russell 2000 ETF IWM, up 1.39% at last check
• The Vanguard Russell 2000 ETF VTWO, up 1.38%
• And the Avantis US Small Cap Equity ETF AVSC, up 1.45%

Read Next:

• EXCLUSIVE: Russell Strategist Uncovers Top Small-Cap Picks — Seizing Opportunities In A Low-Rate Environment

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