Barclays favors S&P 600 over Russell 2000 as rate pressure exposes small-cap divide
IWM•Barclays analysts favor the S&P 600 over the Russell 2000 as higher interest rates pressure smaller companies. About 8% of S&P 600 members report negative earnings, compared with roughly 32% of Russell 2000 constituents.
1. Different earnings profiles
Barclays analysts said the divergence between the S&P Small-Cap 600 and Russell 2000 makes selectivity more important as longer-dated Treasury yields have climbed above 5%. The Russell 2000 has more companies with weaker balance sheets, lower profitability and less stable earnings, while S&P 600 constituents must meet profitability requirements.
2. Estimates and industry mix
Barclays said earnings estimates for Russell 2000 companies are being revised lower faster than usual, while forecasts for S&P 600 members have risen. The S&P 600 has greater exposure to semiconductors and machinery; the Russell 2000 has a larger biotechnology weighting, including many pre-revenue or early-stage businesses. The analysts said investors navigating the high-rate environment should look for S&P 600 companies with favorable fundamentals.
