After a year of substantial underperformance, small-cap stocks could be primed for a significant comeback, according to Greg Tuorto of Goldman Sachs Asset Management.
“Small caps have not been a fun place to be in 2023,” Tuorto acknowledges. He explains that the surge in interest rates has provoked questions about whether small-cap balance sheets can withstand higher interest payments. In addition, innovation has been seen as being driven by larger-cap companies, with investors taking up the idea that the gains from AI and anti-obesity drugs will mostly accrue to the biggest players, he says.
But this belief may be myopic. Smaller companies may actually be in a better position to capitalize on transformative technologies, Tuorto says. “We think that small caps are a great place to access disruptive innovation, because these companies have significantly more leverage to the mega-trends that are out there today.”
When it comes to rates, he points out that the Federal Reserve seems nearly done with its hikes, eliminating a headwind for rate-sensitive companies.
Tuorto’s conclusion? “It’s time for small caps to play catch-up.”