Small cap stocks not “safe haven” BofA expert warns

Investors may look to small-cap stocks as being a safe haven in the wake of the ongoing trade war between the U.S. and China.

Small companies have little dependence on overseas sales and thus give investors the feeling that they are not as vulnerable as big cap stocks to escalations in the trade war.

Yet, Bank of America Merrill Lynch has warned that that is quite far from it and that investors in small cap stocks could get burned.

Wall Street projects that the second half of the year will see small cap stocks return to growth. But BofA-Merrill Lynch says that it would be misguided to think that these stocks are insulated from the effects of a full-blown trade war.

According to Jill Carey Hall, many of the small cap companies are suppliers, working with the multinational companies.

Hall, a small cap expert, and veteran U.S. equity strategist adds that a lot of the small companies have highlighted the potential “impact of trade on calls this earnings season.”

She also notes that many of these companies might struggle when it comes to reworking their supply chains. That could also be seen in their efforts to price through any impact.

Since early May, the S&P 600 is down 5.4% while the Russell 2000 small cap index has fallen 4.9%. In comparison, the benchmark S&P 500 has declined by 2.9%.

Hall says that small cap earnings have tended to meet, rather than beat expectations and there has been a much bigger trend in terms of negative earnings growth.

Analysts have pointed out that the first quarter earnings for small cap companies may be the worst since 2009. But looking forward, forecasts give the S&P 600 a 6.9% growth in EPS for the third quarter and 23.3% for the fourth quarter.

However, Hall suggests there might be too much optimism on Wall Street. Speaking to CNBC’s “Futures Now,” she said she doesn’t see any imminent rebound.

According to Hall, 25% of the Russell 2000 benchmark has no earnings or [are] non-earnings, and that that typically doesn’t happen “unless you are right outside or leading into a recession.”