The Russell 2000 index has officially entered bear market territory, falling more than 20% from its all-time high in late November 2024. The benchmark for small-cap US stocks has dropped 6.47%, dragged lower by recession fears, rising costs, and fallout from President Donald Trump’s sweeping new tariff regime.
It is the first major US stock index to hit bear territory in the current downturn, underscoring how vulnerable small companies are to both economic slowdowns and global supply chain disruptions.
Reversal of early Trump-era optimism
Small caps had rallied strongly after Trump’s re-election in November, with the Russell 2000 closing out that week up 8.6% — outperforming the S&P 500’s 4.7% gain. Investors bet that tax cuts, deregulation and a focus on reshoring would favour domestically focused firms. At the time, some analysts even forecast that small caps could outperform large caps by more than 100% over several years.
But that narrative has flipped sharply. The latest sell-off was accelerated by the Trump administration’s “reciprocal tariffs” announced on Wednesday — a broad package of import taxes as high as 49% targeting more than 180 countries.
Stocks particularly exposed to international sourcing, such as Victoria’s Secret and Urban Outfitters, led Thursday’s declines on the Russell 2000.
Squeezed on both sides
“Small caps are getting hit because the economy is softening. That’s going to hurt profits,” said Keith Lerner, co-chief investment officer at Truist. “On the other side, they’re still paying high levels of interest payments on debt because they have more of this floating-rate debt. They’re getting squeezed on both sides.”
Analysts warn that small companies have less financial flexibility than their large-cap counterparts and are more exposed to input cost shocks from tariffs. Many small-cap firms also lack pricing power, making it harder to pass on higher costs to consumers.
JPMorgan warned this week that the scale of Trump’s new tariffs makes a US recession more likely.
Depth of the downturn
The Russell 2000 closed at 1,913.12 on Thursday, down roughly 22% from its record close of 2,426.56 on 25 November 2024. That decline is worse than the typical 13% drop seen for small caps during the first half of an average US recession.
Other benchmarks remain above bear market levels. The S&P 500 and Nasdaq Composite are both in correction territory, down more than 10% but less than 20% from their respective peaks. The Dow Jones Industrial Average has dipped but remains just short of correction.
Is there a bottom?
Despite the downturn, some strategists see the potential for a rebound — particularly if the US Federal Reserve cuts interest rates. Markets are now pricing in four quarter-point rate cuts by the end of 2025, with a 95% chance of the first cut arriving in June, according to CME FedWatch data.
Lerner, who remains underweight small caps, pointed to possible catalysts later in 2025 — including tax policy changes and increased merger activity — that could support a rebound.
While large caps have been more resilient, Lerner noted that the damage to small caps has been ongoing for months. “With small caps being down 20%, it tells you they’ve already been down — the bear market didn’t start here. It’s been going on for several months.”
