(News Bulletin 247) – The variation since January 1 of the Russell2000, the flagship index of American “midcaps”, has fallen into the red. The fault in particular is the rise in interest rates.

In stormy weather, smaller ships tend to capsize much more easily. This is also the case on the stock market. And the United States is no exception. As noted by several market specialists, including John Plassard, investment advisor at Mirabaud, the Russell 2000 has fallen back into negative territory.

As a reminder, the Russell 2000 is a benchmark index for mid or even small caps on Wall Street. Its shareholder with the greatest weight on the stock market, the IT group Super Micro Computer, has a capitalization of “only” $14.51 billion, which is relatively low for a company listed on the American markets.

According to the index fact sheet, the average capitalization of the approximately 2,000 stocks making up this index is only $2.98 billion with a median of $922 million. This index has fallen by 0.25% since the start of the year, and has lost 6.5% over one month. In comparison, the S&P 500 increased by 11.7% over the whole year.

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“The Magnificent Seven”

But two explanations qualify this statement. First of all, the relatively satisfactory rise in the S&P 500, as we have written on several occasions, is in reality only driven by a handful of stocks, several of which have benefited from the market’s enthusiasm for artificial intelligence. (AI) generative.

This is the case of Microsoft (+34.2% over 2023) and especially of Nvidia (+206%). To a lesser extent Tesla (+104%) too, notably thanks to Morgan Stanley which recently saw in its “Dojo” supercomputer a source of growth which could disrupt Tesla’s economic model, as Amazon Web Services did with Amazon .

Thus seven stocks (Amazon, Apple, Tesla, Microsoft, Nvidia, Meta, Alphabet) carry the index. To restate their weight, it is worth looking at the S&P 500 Equal Weight, where each stock in the index has an equal weight and not proportional to its market capitalization. This index shows a decline of 0.8% over the whole of 2023.

In other words, American small and mid-caps do not underperform the S&P 500 that much, excluding the stocks that are now nicknamed the “magnificent seven”.

A difficult situation

The second explanation comes from the rise in interest rates which hurts smaller companies more severely, because they theoretically have fewer options for financing themselves.

“Since the start of the rate hike, a record one in three companies have lost money on the Russell 2000 compared to about one in 20 for the S&P 500,” observed Bank of America in a note published this week. last. Anecdotally, Bank of America also notes that Apple’s market capitalization has now and for the first time exceeded the entirety of that of the Russell 2000.

For comparison, in France, the CAC Mid&Small also underperforms the CAC 40, falling by 3.5% over the whole of 2023 when the flagship index of the Paris Stock Exchange advances by 9% over the same period.

“As soon as the economy deteriorates, the market returns to large stocks. Covid, inflation, all these elements weigh down small and mid-caps because these companies suffer, on average, more than large companies when the economy loses strength. speed”, Pascal Quiry, professor of finance at HEC and co-author of the Vernimmen stock market newsletter, explained to us last May.

An observation which also applies, therefore, to American groups…