As we mentioned, the NFIB small business index is looking great and the S&P 500 earnings growth is strong. However, the Merrill Lynch chart below shows not all companies are prospering. It shows the percentage of Russell 2000 members which aren’t making any money. It’s remarkable to see that the percentage has increased even after the commodity crash and slowdown in 2015-2016 have ended.
The economy has recovered, but over 25% of Russell 2000 firms don’t make money. This is while the Russell 2000 is at its record high and up 11.89% year to date. The Russell 2000 has been helped by the strong dollar and the improving economy, but many firms are poor operators. To get in the S&P 500, a firm needs 4 straight quarters of as reported profits. This explains why Tesla isn’t in the index even though it is one of the biggest auto makers in the country. It’s also important to recognize the cyclicality of this chart of non-earners. When the rate has been this high since 1985, the economy has been either in a recession or close to one.