The Russell 2000 dropped hard on Thursday, sliding 6.6% during the session and putting it 22.5% below its 52-week high, which means small-cap stocks are officially in a bear market. Wall Street uses a 20% drop as the line for that.
The S&P 500 and Nasdaq also plunged, both firmly locked in correction territory, which kicks in at a 10% decline. The Dow Jones Industrial Average isn’t there yet, but it’s hanging just above that level.
This all hit after President Donald Trump rolled out the most intense wave of tariffs the U.S. has seen in nearly a hundred years.
Tariffs hammer small caps while rising debt costs pile on
Small caps were once seen as Trump’s golden boys. Right after the 2016 election, they went on a tear. The Russell 2000 jumped 8.6% that week, way ahead of the 4.7% gain from the S&P 500.
The story back then was that small companies, with less exposure to foreign markets, would thrive under deregulation and tariffs. Tom Lee, managing partner and head of research at Fundstrat, even said at the time that small caps could outperform by more than 100% over the next few years.
But this week flipped that script. These same small-cap names are getting wrecked. Keith Lerner, co-chief investment officer at Truist, told CNBC, “They’re getting hit because the economy is softening. That’s going to hurt profits.” He added:
“They’re still paying high levels of interest payments on debt because they have more of this floating-rate debt. They’re getting squeezed on both sides.”
Wall Street traders now think there’s a 71% chance the Federal Reserve cuts rates four times before the end of 2025. They’re also betting almost 100% on the first cut happening in June, based on data from the CME FedWatch Tool.
Bitcoin sinks with Nasdaq as investors ditch risk
Bitcoin didn’t do anything to protect anyone this week either. While it was designed to exist outside the traditional system, it went down with the rest of the risk assets. Since Wednesday afternoon—when Trump’s tariffs were announced—Bitcoin dropped around 4%.
The Nasdaq 100 dropped 5.5%, its biggest one-day loss in over two years. The S&P 500 fell 4.8%, the worst since 2020. Gold held up better, slipping less than 1% and still staying positive for the year.
This disconnect between gold and crypto isn’t new, but it’s getting wider. Mike McGlone, senior commodity strategist at Bloomberg Intelligence, said, “The backing up stock market along with Bitcoin declining and gold rising is proving Bitcoin is more leveraged beta than digital gold.”
That’s odd, because crypto isn’t even affected by tariffs. No one’s taxing digital tokens. Jeff Dorman, chief investment officer at Arca, said:
“Logically, it obviously makes zero sense that crypto is keying on tariffs since, by definition, crypto is probably the only industry in all of the financial markets that is NOT affected in any way by tariffs. Remind me, exactly which digital goods are being taxed?”
Though there is one area in crypto that could get hurt: mining. Most of the hardware needed to mine Bitcoin comes from overseas. That’s where the tariffs hit.
Matthew Sigel, head of digital assets research at VanEck, said, “The tariffs may significantly affect the Bitcoin mining sector, as a large share of current mining server imports has been sourced from Malaysia, Thailand and Indonesia.”
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