American small businesses are thriving, and investors prefer them over larger companies this year. The Russel 2000 index, which includes largely the shares of smaller businesses, is up 7% this year and trading at an almost all-time high. Other indexes, including the Dow and S&P 500, which include major stocks such as Apple, Coca Cola and Boeing, have only increased by 1% or 2%, each approximately 5% below record highs.
The shift is a result of several factors, including some changes within the US economy itself. First, smaller businesses like those in the Russel 2000 are growing profits at a much faster rate than larger corporations, with projections of another 40% increase this year and an additional 23% in 2019. According to Nationwide chief of investment research Mark Hackett, “President Donald Trump’s tax cut and deregulation policies favor smaller companies over large, multinational blue chips.”
Indeed, the companies in the Russell 2000 are supported primarily by the American economy, while global corporations like Coke generate revenue from all over the world.
Small businesses have also paid higher taxes in the past, so recent corporate tax cuts have had a greater impact on them than on their larger counterparts.
Small businesses can also be considered lower risk, as they are influenced less by international market fluxes. US-China trade talks and global growth have little to do with local American businesses.
“A lot of large caps stumbled earlier this year and there has been volatility. People are looking to small caps. There are just more opportunities,” said Dave Harden, president and CIO at Summit Global Investments.
Analysts believe smaller businesses will continue to grow in the U.S. in the coming years, carving a new, permanent space in the stock market.