Chart to Watch: Can cash-flow-positive companies bounce back after 2025?

In 2025, a sharp factor reversal occurred where traditionally weak, negative FCF companies in small- and mid-cap indices dramatically outperformed their higher-quality peers. This divergence mostly occurred post-Liberation Day in a market driven by speculative, lower-quality, and higher-momentum stocks rather than fundamentals. The chart above details performance for the small-cap Russell 2000 Growth Index, but the same dynamic extended to the small- to mid-cap Russell 2500 Growth Index.

The strong performance of negative-FCF names is highly atypical given their longstanding tendency to underperform across full market cycles. Over a 10-year period, cash-generative companies substantially outperformed those with negative cash flow. This sets the stage for potential normalization.

Companies with negative FCF yield rely on external funding to operate or grow, making them more vulnerable to rising rates, refinancing needs, and business model stress. Positive FCF companies, meanwhile, generate excess cash, enabling self-funded reinvestment, disciplined balance sheet management, and reduced exposure to dilutive financing in tougher market environments.

We see the potential for mean reversion favoring high FCF-yielding companies. Many structurally weak FCF companies fall into the speculative-grade debt category, which faces a rising “maturity wall” as large blocks of debt come due in the next few years. The Russell 2000 and Russell 2500 indices have averaged 25% and 20% exposure to negative FCF companies, respectively, over the last decade. If the market begins to re-price these refinancing and cost-of-capital risks, leadership historically shifts back toward businesses with durable cash generation.

Smaller capitalization securities may be less stable and more susceptible to adverse developments, and may be more volatile and less liquid than larger capitalization securities.