The Russell 2000 small-cap index could outperform the S&P 500 over the next 12 months, according to analysts at Goldman Sachs (NYSE:GS).
In a report published Wednesday, Goldman analysts wrote that the Russell 2000 should gain 14% over the next year while projecting a 9% gain for the S&P 500 for the same period.
This would “mark a position change” as the S&P 500 usually outperforms the Russell 2000, the analysts pointed out in the note.
However, they also noted three near-term macro headwinds facing the Russel 2000, the first being rising interest rates because listed companies in this index tend to have a higher debt burden than those listed in the S&P 500.
The second headwind is economic development as, if a recession is avoided, small-cap stocks do not perform as well in the later stages of the business cycle with investors favoring companies with bigger balance sheets.
Third is sector composition, with the Russell 2000’s high exposure to cyclical stocks, regional banks, real estate, and biotech making it more vulnerable to slowing growth, rising rates, and the re-emergence of financial stability concerns, Goldman’s analysts wrote.
“Goldman’s basic analysis shows the propensity for the small-cap sector to begin to outperform in a big way,” commented Channelcheck managing editor Paul Hoffman.
“The report did not lay out a scenario where the report may have underestimated where the Russell small cap index may be in 12 months, but with all the less-than-knowns surrounding this year, and an election year, it is safe to presume that the analyst could also have undershot where actual performance will be 12 months into the future.”
Contact the author at emily.jarvie@proactiveinvestors.com
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