October 1, 2025

QuickTakes

Russell 2000 Is For Losers,

But Is Currently Winning

The Russell 2000 small-cap stock price index is outperforming the S&P 600, another small-cap index (chart). The former includes many more companies that are losing money than the latter. This is yet another sign of mounting speculative froth in financial markets in response to the Fed's 25bps cut in the federal funds rate on September 17.

The S&P 600's requirement that companies demonstrate positive earnings before being included acts as a screening tool, filtering out many of the most speculative or financially distressed businesses that are often found in the broader Russell 2000.

The percentage of companies in the Russell 2000 Index that lose money has generally been quite high in recent years, often hovering around 40%. The similar percentage for the S&P 600 is closer to 20%.

Within the S&P 500 LargeCaps, the Magnificent-7 have been outperforming the S&P 493 since late April, as confirmed by the ratio of the MAGS ETF to the XMAGS ETF (chart). During September, the ratio stopped rising as investors reassessed whether all the money that hyperscalers are spending on AI infrastructure will ever be profitable.

During the Q3 earnings reporting season ahead, we expect the Magnificent-7 to once again report solid earnings gains, with an increasingly significant contribution from their AI businesses. They should also reiterate their commitment to investing heavily in their AI businesses. We also expect that the managements of the S&P 493 will spend some time during their earnings calls reporting on how AI may be starting to boost their earnings.

Speaking of losers, today's ADP private sector employment report was a real downer. Private sector employment shed 32,000 jobs in September. This figure was a notable miss compared to economists' forecasts, which had generally predicted a gain of around 52,000 jobs. The previous month's job growth was also significantly revised down from an increase of 54,000 to a loss of 3,000 jobs. The three-month average change in ADP payrolls was only 23,000 through September (chart).

As we noted on Tuesday, following the August JOLTS report, companies hired 5.1 million workers during the month; however, this number matched the separations resulting from quits and firings. So there was no net gain in employment. Companies appear to be freezing their payrolls while they assess how AI can help them boost their productivity.

Also on the weak side still is the ISM manufacturing purchasing managers index in September (chart). That's no surprise since it confirms the weakness in last month's regional business surveys.

Finally, September's prices-paid indexes from both the ISM manufacturing survey and the regional business surveys suggest that the inflationary shock from Trump's Tariff Turmoil may be peaking. The Trump administration can rightly claim that its tariffs didn't boost inflation. However, the tariffs kept inflation stuck around 3.0% rather than falling to 2.0%.

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