Wednesday, April 30th, brought strong earnings from two of the Magnificent Seven, Microsoft (MSFT) and Meta Platforms (META) with both companies beating expectations on revenue and earnings per share.
But that optimism was tempered by a more sobering data point: the U.S. Bureau of Economic Analysis (BEA) released its advance estimate for first-quarter 2025 GDP, and the headline number came in negative.
Here are our quick hits on what to make of the contraction, and what it might mean going forward for small-cap investors.
The Good, The Bad, and the Ugly
According to the U.S. Bureau of Economic Analysis (BEA), real GDP decreased at an annual rate of 0.3% in the first quarter of 2025.
The contraction was largely attributed to a rise in imports and a decline in government spending. Neither is especially surprising given the White House’s ongoing tariff-heavy trade policy and new cost-cutting efforts from the Department of Government Efficiency (DOGE).
What’s worth noting is that the decline wasn’t across the board. The BEA said the drop in GDP was only partially offset by increases in consumer spending, private investment, and exports, though these weren’t strong enough to fully counter the drags.
The most alarming detail that may catch the Fed’s attention was the pickup in inflation. The Personal Consumption Expenditures (PCE) Price Index rose 3.6% in Q1, up from 2.4% the prior quarter. That kind of acceleration is troubling, especially when paired with slowing growth.
While most headlines focus on CPI, the Fed has been clear: PCE is its preferred inflation gauge. A combination of rising prices and stagnant or falling output is the classic recipe for stagflation, something investors and policymakers will be watching for closely.
How Small Cap Investors Should Position
The combination of falling GDP and sticky inflation isn’t great news for small cap investors. This segment of the market is already more economically sensitive than large caps.
Small businesses tend to have less pricing power, thinner margins, and more exposure to domestic demand. They also tend to be concentrated in cyclical sectors like industrials and finance.
That sensitivity gets amplified when you consider how most investors access this space: through the Russell 2000 index, which comes with its own structural issues. It is a broad benchmark, but it doesn’t filter for quality. That’s a problem.
According to Torsten Sløk, Chief Economist at Apollo, as of September 2024, 42% of Russell 2000 companies had negative earnings. That compares to just 14% in the Russell Midcap Index and 6% in the S&P 500.
For investors, that means heightened risk of shareholder-unfriendly actions like dilution from new equity issuance, convertible debt deals, and in some cases, outright delisting or bankruptcy. Given the boom-or-bust nature of small caps, we believe a quality-first approach is essential.
For us, one of the cleanest ways to screen for profitability is by focusing on small caps that pay dividends. A dividend implies positive cash flow, consistent earnings, and a management team confident enough to return capital to shareholders. These are all signs that a company may be in a better position to grow from small to mid cap over time.
About Us
Jay D. Hatfield is CEO of Infrastructure Capital Advisors and is the lead portfolio manager of the Infrastructure Capital Bond Income ETF (NYSE: BNDS), InfraCap Small Cap Income ETF (NYSE: SCAP), InfraCap Equity Income Fund ETF (NYSE: ICAP), InfraCap MLP ETF (NYSE: AMZA), Virtus InfraCap U.S. Preferred Stock ETF (NYSE: PFFA), InfraCap REIT Preferred ETF (NYSE: PFFR) and private funds. Each month Infrastructure Capital hosts a monthly economic webinar; you can sign up to attend by visiting our website www.infracapfunds.com (important disclosures can also be found on the website). For a prospectus please reach out to us or visit the links above for each respective fund.
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The information contained herein represents our subjective belief and opinions and should not be construed as investment, tax, legal, or financial advice. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. Please read the prospectus carefully before investing. For more information about the Fund, Fund strategies or Infrastructure Capital, please reach out to Craig Starr at 212-763-8336 (Craig.Starr@icmllc.com). The Funds are distributed either by Quasar Distributors, LLC or by VP Distributors, LLC, an affiliate of Virtus ETF Advisers, LLC. ICAP, SCAP, and BNDS ETFs are distributed by Quasar Distributors LLC. PFFA, PFFR, and AMZA ETFs are distributed by VP Distributors, LLC an affiliated of Virtus ETF Advisers, LLC.