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Sustainable Investing

Reborn in the USA: How Reshoring May Benefit Small-Cap Stocks

Many companies are bringing their supply chains and operations back to the U.S. in the wake of the pandemic.

By Mike Rode, CFA
A semiconductor being made.

Key Takeaways

COVID-19 accelerated the business trend of bringing jobs and operations back to the U.S.

Supply chain, intellectual property and environmental, social and governance (ESG) issues support reshoring.

We think small-cap firms may benefit significantly from positive reshoring impacts across the U.S. economy.

In November 2022, Panasonic broke ground on a new lithium-ion battery manufacturing facility on the site of a former World War II-era ammunition plant in eastern Kansas.

Slated to open in March 2025, the $4 billion facility is expected to create 4,000 jobs and represents the largest private investment in Kansas history.1 Panasonic already operates a joint battery plant with Tesla in Nevada and plans to build a third somewhere in the central U.S.

Similarly, Micron Technology announced in October that it would build a $20 billion semiconductor chip factory in upstate New York. That investment, over time, could balloon to $100 billion and bring 50,000 jobs to the region.2

The biggest thing these new plants have in common is that they won’t be built in China or somewhere else overseas. After offshoring production to take advantage of low labor costs and increased global trade in the 1970s, many U.S. firms are moving manufacturing back to the U.S. We believe small-cap companies may benefit from these reshoring efforts.

COVID Hastened Reshoring by U.S. Manufacturers

The “reshoring” of jobs to the U.S. actually began more than a decade ago. Between 2010 and 2020, domestic companies and direct foreign investment returned about 1 million manufacturing jobs to the U.S.3 But the onset of COVID-19 and its concurrent global supply chain woes dramatically accelerated the trend.

Since the beginning of 2020, about 800,000 jobs have returned to the U.S., including an estimated 348,493 in 2022. Job numbers have increased by about 80,000 in each of the past three years.4

Figure 1 | Bringing Jobs Back to the U.S.

Job Announcements Resulting From Reshoring

Source: The Reshoring Initiative. Data from 2010 to 2022. Figures represent job announcements from production brought back to the U.S. and from Foreign Direct Investment.

Source: The Reshoring Initiative. Data from 2010 to 2022. Figures represent job announcements from production brought back to the U.S. and from Foreign Direct Investment.

As the pandemic progressed, almost 70% of domestic manufacturers considered bringing production back to North America.5 The rate at which U.S. executives discussed reshoring on first-quarter corporate earnings conference calls in 2022 increased by a factor of 10 compared after few mentions of the topic just two years ago.6

Companies’ desire to regain control of their supply chains has intensified the reshoring trend. Relying on foreign suppliers has proved increasingly problematic because manufacturing, especially in China, has halted periodically during the pandemic. Shipping costs also have soared, and although U.S. ports are no longer as clogged, overseas shipping delays remain routine compared with pre-pandemic schedules.

Revitalizing Domestic Production May Help Mitigate IP and ESG Risks

Shipping and supply chain considerations don’t fully explain reshoring’s broader appeal. Companies in many industries, especially technology, aerospace, defense and pharmaceuticals, must closely guard their intellectual property (IP) in a world that’s ever more susceptible to hackers and outright theft.

Even before the coronavirus, up to 20% of North American corporations claimed China had stolen their intellectual property. The FBI estimates that counterfeit goods, pirated software and trade secret theft cost the U.S. economy up to $600 billion annually.7

Concerns about IP theft led to the recent bipartisan passage of the U.S. CHIPS and Science Act, which prioritizes U.S. leadership in the semiconductor industry and will provide $280 billion in subsidies during the next decade for manufacturers to produce chips domestically.

Environmental, social and governance (ESG) concerns, ranging from labor practices to carbon emissions, have also pushed more companies to produce materials and products in the U.S. The federal government has tighter regulations and laws protecting labor rights and the environment than many other countries, attracting buyers focused on ESG standards in their supply chains.

A recent Ernst & Young survey found that 80% of supply chain executives are increasing their efforts to build sustainable supply chain operations.8

Automation has helped bridge the gap between lower overseas labor costs, and trade tensions exacerbated by the Russia/Ukraine war and China’s authoritarian retrenchment have helped reshoring gain further traction.

U.S. consumers also tend to respond well to the “Made in USA” label, as evidenced by Walmart’s intention to spend $350 billion through 2030 on items grown, made or assembled in the U.S.9

Reshoring Has Cascading Impacts on Small-Cap Firms

The Economic Policy Institute estimates that every manufacturing job that returns to the U.S. generates seven new jobs in supporting industries — everything from more regional banks for lending, more housing for workers and more restaurants to serve them. Smaller yet significant multiplier impacts are evident for reshored information technology, professional, transportation, construction and service jobs.

But reshoring costs are significant. Bank of America estimates that U.S. and European companies could spend as much as $1.2 trillion as they attempt to secure greater control of their supply chains and production operations.10 These corporate costs primarily come from capital expenditure (CapEx) budgets, and revenue growth at small-cap companies is highly correlated with CapEx growth in the overall U.S. economy.

U.S. small-cap companies typically exhibit more sensitivity to the economy than their large-cap counterparts, so we think they are poised to reap the biggest benefits from reshoring. Since 1985, sales growth for U.S. small-cap firms shows an 85% correlation with CapEx growth for firms in the Russell 2000® and S&P 500® indices, compared with 76% from large-cap firms.11

At the same time, U.S. job growth disproportionately helps U.S. small-cap firms, as they derive 82%% of their revenue, on average, within the country. By comparison, U.S. large-cap firms garner 61% of their revenue from U.S. sources.12

Inflation Aside, the Reshoring Trend Will Likely Stick Around

From a broader perspective, reshoring has a key drawback for the U.S. economy and the equities market.

In aggregate, reshoring exacerbates inflation. Its widening appeal to U.S. companies could heighten borrowing costs for an extended period if the Federal Reserve (Fed) keeps raising interest rates in its battle to control inflation.

However, small-cap stocks have tended to show their most significant outperformance versus large-cap stocks in periods when inflation exceeded the Fed’s 2% inflation target.13

In our view, reshoring is a trend that will continue regardless of its impact on the financial markets and the economy. It has specific tangible benefits for a broad range of U.S. companies, especially small-cap firms.

And while investors may not reap immediate benefits, we believe reshoring could potentially accelerate revenue and earnings growth for small-cap companies throughout the next decade.

Mike Rode, CFA
Mike Rode, CFA

Vice President

Senior Investment Director

Explore More Insights

Andrew J. Hawkins, “Panasonic breaks ground on $4 billion EV battery plant in Kansas,” The Verge, November 4, 2022.

Micron Technology, “Micron Announces Historic Investment of up to $100 Billion to Build Megafab in Central New York,” Press Release, October 4, 2022.

Rob Spiegel, “U.S. Manufacturing Roars Back in 2022,” Design News, October 6, 2022.

Michael Ouellette, “Reshoring Is Soaring in 2022 — 350,000 New Jobs Predicted,”, August 28, 2022.

Cathy Ma, “Manufacturer Interest in Reshoring, Hiring, and Apprenticeships Increasing During COVID-19 Pandemic,” Thomas Insights, July 14, 2020.

Jill Carey Hall, Nicolas Woods, and Vivek Arya, et al., “Back to the USA Take 2: Reshoring Update and Who Benefits,” SMID Cap Focus Point, BofA Global Research, August 15, 2022.

Eric Rosenbaum, “1 in 5 corporations say China has stolen their IP within the last year: CNBC CFO survey, CNBC, March 1, 2019; Nicole Sganga, “Chinese hackers took trillions in intellectual property from about 30 multinational companies,” CBS News, May 4, 2022.

Rae-Anne Alves and Glenn Steinberg, “How sustainable supply chains are driving business transformation,” EY Insights, September 20, 2022.

John Furner, “Investing in the Future of U.S. Manufacturing, Our Commitment to American Jobs,” Walmart Press Release, March 3, 2021.

Elliot Smith, “U.S. and European firms face $1 trillion in costs to relocate their Chinese supply chains, BofA says,” CNBC, August 18, 2020. Figure adjusted for inflation.

Hall, et al., BofA Global Research.

Catherine Yoshimoto, “Revenues without borders: Tracking U.S. companies’ cashflows, FTSE Russell, April 29, 2022.

Global Alpha, “Small cap is back: 7 reasons to buy small caps in a recession,” Commentary, November 17, 2022.

Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.

Many of American Century’s investment strategies incorporate sustainability factors, using environmental, social, and/or governance (ESG) data, into their investment processes in addition to traditional financial analysis. However, when doing so, the portfolio managers may not consider sustainability-related factors with respect to every investment decision and, even when such factors are considered, they may conclude that other attributes of an investment outweigh sustainability factors when making decisions for the portfolio. The incorporation of sustainability factors may limit the investment opportunities available to a portfolio, and the portfolio may or may not outperform those investment strategies that do not incorporate sustainability factors. ESG data used by the portfolio managers often lacks standardization, consistency, and transparency, and for certain companies such data may not be available, complete, or accurate.

References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.