The higher-for-longer interest rates narrative could continue to negatively affect small-cap companies. This is because they look to stay afloat in the current macroeconomic environment.

Heading into 2023, there was much optimism for small-caps and all equities in general. This is because capital markets expected high rates to eventually dissipate. However, stubborn inflation is putting many small companies in a bind. This is because the Federal Reserve keeps monetary policy tight. That makes it more expensive to borrow money amid rate hikes.

Larger-cap companies often have the reserve capital to withstand the high borrowing costs. The same can’t be said for small-caps. While the S&P 500 is up about 11% for the year despite the recent pullback, the Russell 2000 recently went into negative territory as rising rates continue to rack these companies.

A drop in the Russell 2000 could also be more indicative of the broader economy compared to their larger-cap brethren. The higher-for-longer narrative could continue to strain these companies financially until the Fed decides to loosen monetary policy. Nobody knows when that might occur.

“The Russell 2000′s comparative weakness relative to the broad market indexes underscores Wall Street’s concerns that the 2023 market rally has been too narrow,” a CNBC article said. “By contrast, the Russell 2000 is often perceived as a better insight into the state of the broader U.S. economy due to its focus on smaller businesses whose fate depends more on macroeconomic conditions.”