Zombified: 42% Of US Small Caps Still Have 'Negative Earnings'

Amid robust consumer demand and U.S. economic resilience, only a fraction of America’s largest companies have negative earnings this year.

In 2024, S&P 500 firms are forecast to see 9.5% annual earnings growth, exceeding their 10-year average of 8%. Overall, corporate profits have surged by nearly 70% since 2020, led by big tech companies investing in AI technologies. But looking beyond corporate giants, profitability is not as widespread given the riskier nature of small and mid-cap companies.

This graphic, via Visual Capitalist's Dorothy Neufeld, shows the share of companies with negative earnings in U.S. markets, based on data from Apollo.

U.S. Markets by Share of Unprofitable Companies

While the vast majority of S&P 500 companies are seeing positive earnings in 2024, earnings growth is being propelled by a handful of technology giants.

In 2024, the Magnificent Seven is projected to drive 62% of earnings growth across the index, with Nvidia making up 13% of the total. Over the next few years, this trend is projected to continue, although at a slower pace amid increasing competition from new players and higher infrastructure costs.

For mid-cap companies, seen in the Russell Midcap Index, the share of companies with negative earnings stands at 14%, given their higher debt loads.

Over the last decade, mid-cap stocks have lagged behind large-caps, largely due to the outperformance of big tech. However, earnings growth across mid-cap stocks has typically risen at a faster pace since many are developing breakthrough technologies.

Additionally, monetary easing and Trump’s proposed corporate tax cuts could have an outsized effect on small and mid-cap companies due to lower borrowing costs.

While small-cap stocks have been on an impressive run this year, the share of unprofitable companies is considerably high, at 42% of firms in the Russell 2000—up from 14% two decades ago. Like mid-cap stocks, they have underperformed large-caps since 2014, but increasing investor risk appetite may drive an upswing looking ahead.

To learn more about this topic from a performance perspective, check out this graphic on the growth of $10,000 across major U.S. indices.