Micro Caps in 2025: Alarming Performance and Outlook for a Possible Economic Crisis

Microcaps, those companies with a market capitalization of less than $300 million, are starting 2025 on a worrying note. Their performance is significantly below their usual levels, especially compared to theprevious year.

We may be witnessing a temporary correction, an adjustment after several months of remarkable outperformance. However, it is also possible that this reflects a deeper problem. Are we on the verge of a systemic crisis in the era of Trump 2.0, marked by insecurity, unpredictability, and a risk of recession? Does the strategy focused on microcaps remain relevant in 2025? To better understand this question, let's take a moment to reflect and take a step back.

01.01.2025 - 21.03.2025

This year, we observed that the Russell Micro Index and our Micro Caps strategy experienced a faster and more pronounced decline than the US benchmark index, the S&P 500. It should be remembered that this phenomenon is relatively common. Indeed, certain small caps, particularly those listed on the Nasdaq, tend to show a volatility increased relative to their larger counterparts. We have already witnessed this sharper and faster falling dynamic during previous crises, as we will demonstrate below. This could also indicate that a significant decline is to be expected this year for the market as a whole.

01.01.2022 - 31.12.2023

In 2022, the stock market decline caused by rising interest rates had already highlighted this phenomenon. The Micro Cap strategy had fallen rapidly and quite dramatically, suffering losses greater than those recorded by the Russell Micro Index. Although the S&P 500 also experienced a decline, it managed to limit its losses compared to very small caps.

However, by the fall of 2022, the Micro Caps strategy began to rebound strongly, catching up with the Russell Micro Caps Index before the end of the year and then also surpassing the S&P 500. By the spring of 2023, the Micro Caps strategy is clearly back in the green, while the S&P 500 and the Russell Micro Index continue to move in the red.

01.11.2007 - 30.04.2011

The phenomenon reached a particularly pronounced intensity during the subprime crisis. The Micro Cap strategy collapsed rapidly, hitting rock bottom in 2008. Although the Russell Micro held up somewhat, it reached a level similar to that of the Micro Cap strategy a few months later in the spring of 2009. The loss was then more than 60 billion %. The S&P, meanwhile, held up slightly better, but still fell by nearly 50 billion %.

However, starting in April 2009, the Micro Caps strategy experienced a remarkable recovery, quickly outperforming the Russell Micro and then the S&P 500 after a few months. By April 2011, the strategy had completely erased its abysmal losses, while the Russell Micro and the S&P 500 remained stuck in clearly negative territory.

Conclusion

Many dark clouds are gathering over us right now. However, it remains difficult to predict if and when the fire will spread throughout the house. The Micro Cap strategy can sometimes be an early indicator of a bear market, as we saw in 2022 and especially in 2008. That said, it is still too early to determine whether such a trend will materialize this time.

If this is the case, however, the examples above should serve as a compass. After a period of initial turbulence, microcaps are experiencing a very strong rebound. Moreover, it should be noted that the microcap business is very often centered around the domestic market. This is a good point to take into account in the era of neo-protectionism and customs duties.