What’s the most vulnerable segment of the market?

That depends on your macro outlook, but generally speaking, smaller firms have a lot of problems right now. They’re cyclical, and pessimists insist a recession is imminent, evidence to the contrary be damned (everything‘s a lagging indicator now, apparently). They don’t have large cash cushions, they have a lot of floating-rate debt and their maturity wall is quite steep.

Given all of that, it’s small wonder that small-caps are absolutely beset, notwithstanding this month’s broad-market rebound across equities.

Indeed, according to JPMorgan, small-caps are among the only assets pricing a recession as a near certainty.

“The average peak to trough decline for US small-caps has been around 33%,” Nikolaos Panigirtzoglou noted, in his latest. “Since its November 2021 peak, the Russell 2000 has declined by 32%, mechanically implying 32%/33%=97% probability of US recession.”

Small-caps, the bank’s Dubravko Lakos-Bujas recently wrote, are “a suitable place to gauge cyclical risks.”

For obvious reasons, small-caps with weak balance sheets are particularly vulnerable. The figures below are from SocGen’s Andrew Lapthorne.

As Lapthorne’s famous colleague Albert Edwards put it Thursday, referencing the chart on the right, “there are truly a lot of small-cap zombies out there.”

But if you ask Edwards, tech is the most at-risk sector in a recession. Albert’s many fans know the narrative: Some tech shares may be cyclicals disguised as growth stocks.

On Thursday, Edwards cited a couple of charts from JPMorgan (below) in suggesting that tech, “all bulled up with dreams of A.I.,” is uniquely exposed to a downturn.

The implication from the visuals is that tech has an inventory overhang problem. If sales don’t grow enough to solve it, it’d be bad news for profits.

“Should tech investors be nervous that IT inventory is at its highest since the Nasdaq crash?” Edwards wondered. “They sure will see shocking 2001-like EPS surprises in the event of a recession that would expose plenty of IT cyclicals masquerading as growth stocks.”