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SMALL CAPS BIG BREAK: HOW TRUMP'S TAX TWEAK COULD SUPERCHARGE EARNINGS

In a move that's stirring Wall Street buzz, President Trump's 2025 budget proposal is aiming to "Make Interest Deductions Great Again" — and small-cap stocks might just be the winner, Barclays said in a note.

The plan? Change the cap on interest expense deductions from 30% EBIT (earnings before interest and taxes) to 30% of EBITDA (which also includes depreciation and amortization).

This subtle tweak, adding back depreciation and amortization, could unlock a major tax break for companies with heavy capital expenditures and debt loads. Think small-cap industrials, utilities, and communication services.

Barclays estimates that if this rule had been in place in 2024, small-cap earnings (excluding financials) would have jumped by a whopping 12%. That's not pocket change, it's a $4.7 billion tax benefit.

The Russell 2000 Index .RUT, a benchmark for U.S. small-cap stocks reflects this cautious optimism.

As of June 30, it was down about 2.5% year-to-date, but it gained roughly 1% on July 1, trimming its YTD loss to around 1.5%.

With small caps often burdened by higher interest costs, this change could be a lifeline.

But don't call it a comeback just yet. Despite the potential earnings boost, Barclays still favors large caps, citing stronger fundamentals and macro resilience.

So while small caps may get a short-term lift, the smart money might still be betting huge on the big guys.

Could this be the start of a small-cap revival, or just a fleeting fiscal sugar rush?

(Rashika Singh)

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