Wells Fargo Sees U.S. Small Caps Under Pressure After 5.5% Drop

Wells Fargo sees an unfavorable backdrop for U.S. small-cap stocks as debt exposure and earnings downgrades weigh on smaller companies, adding to pressure reflected in the Russell 2000's five-week decline.

The index lost 5.5% over five consecutive weeks through Oct. 9, its longest weekly losing streak since May 2022.

Wells Fargo's concerns include deteriorating profitability and weaker net margins among small-cap companies. Those with more floating-rate debt face greater sensitivity to interest rates because their borrowing costs change as rates move.

Earnings downgrades add to the pressure on smaller companies. Large-cap earnings, meanwhile, have improved, widening the contrast in the outlook for the two groups.