Goldman Sachs’ equity research team has projected a bright near-term future for U.S. small-cap stocks.
According to their analysis shared in a note to clients this week, the Russell 2000 small-cap index, as tracked by the iShares Russell 2000 ETF IWM is set to witness a significant uptick, with an anticipated return of approximately 9% in the next six months and a robust 15% for the full year.
This forecast outshines their predictions for the large-cap S&P 500, which is expected to climb by 7% to reach 5,100 by the end of 2024, amounting to a total return of 9% when including dividends.
Goldman Sachs: Forecast Rationale
- Valuations and Economic Growth: The Russell 2000’s potential for growth is underpinned by its current low valuations and a healthy economic outlook. Historical data shows that nearly two-thirds of its 12-month returns have been influenced by valuations and real U.S. economic growth.
- Comparative Performance: The Russell 2000 is still about 20% lower than its peak in November 2021, while the S&P 500 lags just slightly behind its all-time high from January 2022. This disparity in performance highlights the untapped potential of small-caps.
- Investor Behavior: Recent rallies in the Russell 2000 have been driven more by investments in macro products like futures and options, rather than direct purchases in individual small-cap stocks. This is evidenced by a shift in investor net positions in Russell 2000 futures from $5 billion short to $4 billion long.
- Macro Factors: U.S. economic growth is a critical driver for small-cap returns. Since 2010, the Russell 2000 has shown heightened sensitivity to market pricing of economic growth, more so than interest rates, and has responded more dynamically to economic growth shifts than the S&P 500 or the Nasdaq-100.
- Historical Context in Election Years: The forecasted 15% return aligns with the historical median return of the Russell 2000 in presidential election years. Historically, the index has performed positively in seven out of the last 10 presidential election years and outperformed the S&P 500 in eight of those years.
Historical Performance in Election Years
| Election Year | Russell 2000 Annual Return | S&P 500 Annual Return | RTY vs. SPX Differential |
|---|---|---|---|
| 1984 | (10)% | 1% | -11% |
| 1988 | 22% | 12% | +10% |
| 1992 | 16% | 4% | +12% |
| 1996 | 15% | 20% | -6% |
| 2000 | (4)% | (10)% | +6% |
| 2004 | 17% | 9% | +8% |
| 2008 | (35)% | (38)% | +4% |
| 2012 | 15% | 13% | +1% |
| 2016 | 19% | 10% | +10% |
| 2020 | 18% | 16% | +2% |
| Median | 16% | 9% | +6% |
| % Positive | 70% | 80% | 80% |
The team of Goldman Sachs analysts, led by Ben Snider, also highlighted risk factors and concerns related to small caps. Small-caps could underperform if economic growth weakens more than expected.
Additionally, a sharp rise in interest rates poses a particular threat to small-caps, especially given the Russell 2000’s significant sector weights in Biotech, Banks, and Real Estate.
Read now: December Inflation Preview: What Will It Take To Trigger A Fed Rate Cut In Q1 2024?
Photo: Shutterstock