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Market Updates

March 16, 2023

Short-Term Outperformance of Small Cap Negative Earners Appears Unsustainable Long Term

  • Over the past 36 years, the small cap universe has had cyclical periods of negative earners outperforming positive earners.1 With unprecedented monetary and fiscal support during the COVID-19 pandemic, Russell 2000 Index component stocks experienced one of the more extreme cycles of negative earner outperformance over the next year. From March 2020 to March 2021, negative earning companies outperformed positive earning companies by 61.4%, the fourth largest 12-month outperformance since 1987.2 Positive earners outperformed in both 2021 and 2022, however, erasing the pandemic cycle’s outperformance by negative earners, as discussed in our 2022 Q4 Quarterly Statement.3
  • January’s risk-on sentiment saw negative earning companies in the Russell 2000 outperform positive earning companies by 10.6%. This was the eighth largest monthly outperformance of negative earners since 1987 and the second strongest January on record. While February saw positive earners regain some of their underperformance, year-to-date positive earners are still trailing negative earners by 5.6%, as noted in the chart. We believe this underperformance gap is unsustainable as the Federal Reserve’s hawkish commentary continues to suggest that interest rates will exceed the broader market expectations from the start of the year and remain higher for longer than anticipated. This rate dynamic should continue to pressure negative earners.
  • While there is cyclicality to positive versus negative earner outperformance, over the past 36 years positive earners have experienced almost 3x the annualized return with less than two-thirds the risk.4 With negative earners representing roughly 26% of the Russell 2000 Index, above the longer term average since 1993 of 19.9%, passive allocations may be more susceptible to the higher for longer rate environment. We continue to favor active small cap strategies that seek to invest in positive earners with attractive valuations.


1 We define a negative earner as any company without earnings over the trailing 12 months. For additional reading on negative earners, please see Why Profitability Matters: Positive versus Negative Earners and Negative Earners Could Create Positive Alpha for Active Strategies.
2 The three other periods of significant 12-month outperformance of negative earners versus positive earners were February 1999-2000 with 72.7%, February 2009-2010 with 73.6% and March 2009-2010 with 62.7%.
3 Positive earners outperformed negative earners by 26.7% and 22.2%, respectively, for 2021 and 2022.
4 Since December 31, 1986, the annualized return for positive earners was 9.9% vs. negative earners with 3.2% and standard deviation of 19.5% vs. 33.4%, respectively.

Views expressed include opinions of the portfolio managers as of February 28, 2023, based on the facts then available to them. All facts are gathered in good faith from public sources, but accuracy is not guaranteed. Nothing herein is intended as a recommendation of any security, sector or product. Returns represent past performance and are not guarantees of future results. Actual performance in a given account may be lower or higher than what is set forth above. All investment has risk, including risk of loss. Designed for professional and adviser use.