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Investing.com - Concerns around the impact of federal government spending cuts and a potential U.S. recession could weigh on the appeal of software and small- to medium-sized businesses this year, according to analysts at Bernstein.
Small- and mid-cap companies have retreated from gains logged after the election of U.S. President Donald Trump last November, as immediate hopes that Trump would oversee an era of lower taxes and looser regulation cooled.
The small-cap-focused Russell 2000 index has now slid by more than 6.1% this year, pulled down as well by uncertainty over the broader economic impact of a series of rapid-fire policy changes in Trump’s first months since returning to the White House.
In particular, his plan to roll out sweeping tariffs on both friends and foes alike have exacerbated fears over a refueling in inflationary pressures -- a trend that could persuade the Federal Reserve to leave interest rates at elevated levels for a longer period of time. Small-cap indices tend to be more heavily weighted toward industrials and financials, both sectors which are potentially vulnerable to higher rates, according to analysts cited by Reuters.
The potential that Trump’s tariffs spark a wider recession could also dent smaller software firms by causing clients to pull back on IT budgets, the Bernstein analysts said in a note on Wednesday.
Moves by the Elon Musk-led Department of Government Efficiency to downsize federal expenditures have created possible headwinds for application vendors like ServiceNow (NYSE:NOW) who rely on large government contracts as well, the analysts said.