Small caps enjoyed an attractive run relative to their larger counterparts as investors responded to trade tensions (the idea being that small cap companies rely less on global trade), but new concerns are being raised surrounding total indebtedness. Borrowing costs will be a challenge for US small cap companies in a rising rate environment.
“Excluding financial companies, the Russell 2000’s corporate debt amounts to roughly 3.5 times earnings before interest, taxes, depreciation and amortization, according to Bank of America Merrill Lynch. That is close to highs hit in the early 2000s and above the 1.8 times Ebitda ratio for the S&P 500.”