Doom and Gloom for Small Cap Stocks?

Analysts expect that it is going to be very tough for small stocks to have any momentum as the economy is expected to slow down. Weaker economic growth will make earnings increases harder to achieve. As a result, shares of smaller US companies may end a seven-year streak of beating their larger peers.

Recently, James Furey, a Los Angeles-based strategist at Lehman Brothers Holdings conducted a survey. About forty percent of the investors expect fourth-quarter profits at so-called small cap companies to miss analysts’ estimates.

The Russel 2000 index has yet to recover from a slump in May and June. The members of Russel 2000 index have a median market value of $616 m. In the past two quarters, the index trailed the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 Index. Microsoft and General Motors have escorted the Dow average to a 9.1% gain from this year’s low, set on June 13.

Since 1999, the Russel 2000 has performed well each year in the S&P 500. It has risen 72% during this period, beating the S& P’s gain of 8.7%. The Russel 2000 had its second-biggest loss ever when the US economy fell into a recession in 1990.

The 30-stock average, which is dominated by the biggest US companies, gained 1.5% to 11,679.07, during the week Sept 25 – Sept 29, exceeding its January ’00 record close of 11722.98 in intra-day trading. Intel and General Motors led the Dow’s advance.

Some other surveys are also indicating that the economy is losing momentum. Based on a survey by Bloomberg News, economists expect the Institute for Supply Management to announce that its indexes of manufacturing and services fell in September. However, based on the estimates compiled by Thomson Financial, analysts forecast stronger earnings growth for smaller companies in ’07.