-- Q: Why are shares of small companies coming under more pressure this year than shares of large companies?
A: Being small hasn't been beautiful this year so far.
The Vanguard Small-Cap Index ETF vb is down 11% this year, while the large cap version, the Vanguard S&P 500 ETF ( VOO) is down 7%.
Why are shares of small companies getting bloodied more than large companies this year? One reason hinges on earnings growth expectations, according to research by Bank of America small company stock expert Steven DeSanctis.
Analysts are currently expecting small companies to report 9% growth in the third quarter, down from the 12.4% growth they were calling for a month ago, DeSanctis says. Most of the hits to growth expectations came from financials. Meanwhile, analysts now expect growth in the fourth quarter of 17%, down from 20.3% a month ago.
What's especially interesting is that analysts are now expecting 17.5% growth from large companies, which outstrips the 17% growth expectation for small companies, DeSanctis says.
Given how quickly analysts have slashed earnings expectations for small companies, it wouldn't be that surprising if there was more cutting to come. Given the troubles with the U.S. economy, smaller companies could face some major headwinds as they typically don't export to other countries as much as larger companies do. Meanwhile, smaller companies typically have a tougher time securing financing so any tightening in lending could be an issue.
And the last issue perhaps weighing on many people's minds is the fact that as the market recovery ages, there's a tendency for investors to prefer large companies' shares. Large companies tend to have more stable profit and revenue, making them more attractive to investors worried about an economic slowdown.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at email@example.com. Follow Matt on Twitter at: twitter.com/mattkrantz