Small Cap Rout Is Flashing Red Flag For US Economy

By Tyler Durden

The post-election small cap bounce in US stocks has now been completely erased as it seems tax-reforms have now been entirely priced-out of markets. However, as BofAML notes, the demise of small cap stocks relative to the broad market augurs badly for forward-looking economic growth…

The Russell 2000 is now the worst performing major index this year, up just 1% YTD…

Via BofAML,

After outperforming large caps by over 10ppt in the one month following the US election, small caps have all but wiped out that outperformance over the subsequent eight months.

And while we remain bearish on small caps, and see far more reasons to be cautious, we view tax reform as the biggest risk to our bearish outlook now that it has essentially been priced out of the market.

Small cap earnings growth continues to lag

Small cap earnings growth has lagged that of large caps in each of the past four years, and that streak appears on track to continue, at least for the first half of 2017.

As earnings season draws to an end, small caps are on track to post negative 2Q profit growth (-8%) compared to positive growth for mid (+7%) and large (+9%). Earnings …read more

Source:: ZeroHedge