8 minute read
Unprofitable Stocks Are Killing It Lately - Here’s Why
- Since April 2025, unprofitable small-cap stocks in the Russell 2000 have outperformed profitable ones by nearly 20% as investors front-run expected Fed rate cuts.
- Liquidity is driving the rally, not fundamentals - with cheaper borrowing costs breathing short-term life into weaker balance sheets and riskier names.
What you need to know: Since the trade war started in April 2025, stock prices of unprofitable companies have significantly outperformed profitable ones - with the Russell 2000’s negative earners up roughly 35–38% versus 15–18% for positive earners.
Why it matters: It’s another reminder of how quickly markets can front-run policy moves. As investors price in rate cuts, liquidity is being pulled forward - rewarding weaker balance sheets and relatively riskier names first. Fundamentals haven’t changed, but the cost of money is beginning to, and that’s enough to distort performance in the short run.
Now the Deep Dive: A somewhat paradoxical trend has been unfolding since April 2025 - and it’s one that’s caught my attention.
I’m talking about the widening gap between non-profitable and profitable small-cap firms.
That’s a spread of nearly 20 points.
“Wait, that seems backward. How are unprofitable firms outperforming the ones actually making money?”
Well, the answer lies in liquidity - and the market’s anticipation of rate cuts.
See, through most of 2025, both groups traded in tandem. But starting in early September, the divergence really took off. It became clear the Fed was preparing to cut rates - amid a rapidly cooling job market - and the market began pricing in cheaper money.
- This is another example of how “bad news is good news” in the market’s eyes.
So why does that matter?
Because more liquidity = a boost to marginal companies first.
Lower rates imply lower interest expenses, higher earnings, and new financing options.
- Think of it like this. If a company wasn’t profitable when rates were 6% but could turn cash-flow positive at, say, 4% - that difference can completely change its outlook (and its stock price).
Such improvements are far more impactful for struggling firms than for those already running efficiently.
Put simply, rate cuts breathe life into the weakest players - at least temporarily.
It also gives consumers a bit more breathing room to borrow and spend (though I’d argue the marginal boost will be limited this time).
Still, the market is front-running liquidity, bidding up unprofitable names today in hopes of higher growth tomorrow.
Let’s see if it continues.
Figure 1: Apollo, October 2025
A Split Economy: Half of America Is Quietly Slipping Into Recession
- Moody’s data shows that nearly one-third of U.S. GDP now comes from states already in or nearing recession, revealing an economy far more uneven than national averages suggest.
- The U.S. isn’t in a recession yet - but it’s leaning that way, as major engines like California and New York lose momentum.
What you need to know: According to Moody’s Analytics, roughly one-third of U.S. GDP now comes from states that are either in recession or at high risk of entering one2.
Why it matters: These regions span the map - from manufacturing hubs in the Midwest, to Sunbelt boomtowns, to northern partners - and they’re showing growing signs of strain. Another third of states are barely breaking even, while the remaining few are still expanding - but with momentum eroding.
Now the Deep Dive: Many look at the U.S. economy as one big machine - but it’s really 50 engines running at different speeds.
Thus, to gauge the true direction of growth, it’s critical to look at state-level trends that drive the national picture - especially in California, Texas, New York, and Florida (which together make up nearly 40% of U.S. GDP).
So, how do we do that?
Well, Mark Zandi - Chief Economist at Moody’s - tracks such data to gauge where each economy sits in the business cycle - growing, slowing, or tipping into recession.
He uses a mix of indicators like unemployment, delinquency rates, manufacturing, and personal income growth to form a real-time map of U.S. economic health.
And his latest update paints a sobering picture - highlighting a split nation.
- Roughly half the states (23) have tipped (or are tipping) into recession.
- 16 states are still growing.
- And then 11 states that are treading water (stagnating).
Life keeps getting more expensive (inflation). Housing remains largely unaffordable. Job creation has slowed to a crawl, and once revisions are in, it’ll likely look even weaker. Only a few sectors - healthcare and hospitality - are still hiring, while construction, manufacturing, technology, finance, and government are quietly cutting - especially in states heavily dependent on public-sector jobs like Washington, D.C.
The national outcome now hinges on two of the largest economic engines that are tipping - California and New York. Neither is in contraction, but both are struggling to gain any momentum.
With all this in mind, it appears that the economy sits in a tug-of-war between opposing forces:
- Headwinds: Trade tensions, sticky inflation, and aggressive immigration policy.
- Tailwinds: AI investment, record household wealth, and resilient high-income spending (the top 10% of U.S. earners now account for nearly half of all consumer spending).
Who wins is anyone’s guess.
But one thing is clear. The U.S. economy isn’t exactly sinking - but it’s drifting dangerously close to the edge.
Figure 2: Mark Zandi, Chief Economist at Moody's Analytics, October 2025
When Money Stops Moving: Why the Real Problem Isn’t Liquidity - It’s Velocity
- The velocity of money fell in Q1 2025 for the first time since 2021, showing that dollars aren’t circulating through the economy as fast as before.
- It’s not a cash shortage - it’s a transmission problem: decades of easy money have pushed liquidity into assets instead of spending, fueling bubbles but not real economic activity.
What you need to know: The velocity of the money (M2 - a measure of how quickly dollars circulate through the economy - declined for the first time since 2021.
Why it matters: A falling velocity of money doesn’t mean there’s not enough cash - it just means the cash already in the system isn’t being used (turned over). That’s a warning sign for growth because it shows households and businesses are holding, not spending. And when money sits still, it dulls the impact of fiscal stimulus. But on the other hand, it can decelerate inflationary pressures and point to an economy that’s running increasingly on credit.
Now the Deep Dive: When economists talk about “liquidity,” they usually mean how much money is available. But velocity tells you something more important - how much people actually use that money.
- If Person A spends $1 at a coffee shop, the barista uses that same dollar to buy groceries, and the grocery clerk spends it again on gas - that single dollar has supported $3 of economic activity. And, in theory, the faster money changes hands - the stronger the economy.
This is why velocity matters. A central bank can flood the system with liquidity, but if no one spends it, it’s a liquidity trap - aka when money piles up in banks instead of circulating.
- It’s like pushing on a string: more cash won’t help if it never moves from Person A to B to C.
In simple terms, the equation looks like this: M × V = Nominal GDP3.
Meaning - the amount of money (M) times how fast it moves (V) equals the total value of everything we buy and sell in the economy (GDP).
And the more money people have and the faster they spend it, the bigger the economy grows (and the faster prices rise).
Note that after the pandemic, velocity ticked higher as consumers spent stimulus checks and pent-up savings. But since mid-2025, that momentum has faded. Households are tightening belts, businesses are cautious, and money is moving more slowly - the first decline in nearly four years.
This isn’t just weaker demand; it’s a breakdown in transmission. The Fed can cut rates or expand reserves, but if that money doesn’t circulate, policy loses power. It’s the difference between filling the pipes and getting water to flow.
And while markets cheer liquidity injections, the deeper story is that money itself has stopped moving - a far harder problem to fix (just ask Japan or China).
- Velocity has been falling since the early 2000s as the money supply outpaced spending. This has helped spur “asset bubbles” as all this money that wasn't spent in the economy flowed into assets like homes or Wall Street..
All else equal, it may keep a lid on inflation for now.
But like most overlooked trends in economics, this one matters - because once velocity wakes up, everything changes.
Figure 3: St. Louis Federal Reserve, Dunham, October 2025
Anyway, who knows how this will all play out?
This is just some food for thought as we watch how these trends develop.
We’ll be keeping a close eye on things. Enjoy the rest of your weekend.
Sources:
- Stock Market Performance Since Liberation Day - Apollo Academy
- Map shows which states face recession, and which are growing - Newsweek
- Understanding the Velocity of Money: Definition, Formula, Real-World Examples
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information.
Russell 2000 Index - The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.