Under the surface

Today’s chart from Apollo’s Chief Economist shows that close to 40% of the companies in the Russell 2000 index currently report negative earnings over the last 12 months. Investing via a broad small-cap index therefore means having a meaningful exposure to businesses that are not yet profitable.

In an environment of slower growth or higher refinancing costs, this segment of the market can be more sensitive, as many of these companies operate with less diversified business models and more constrained balance sheets. At ECP, when we invest in smaller companies, we prefer a selective approach, focusing on resilient cash flows, solid balance sheets and a clear path to sustainable profitability – the key driver of long-term compounding.