Goldman Sachs remains optimistic about small-cap stocks, despite the Russell 2000 experiencing its worst week since early January. Greg Tuorto, who manages the actively managed Goldman Sachs Small Cap Core Equity ETF (GSC), believes that easing financial conditions will benefit the small-cap group. However, he advises investors to be selective in their choices as small-cap stocks can exhibit significant volatility. Tuorto recommends looking beyond the benchmark small-cap index to identify high-quality names, with Federal Signal Corp., SPX Technologies, and Core & Main being among his fund’s top holdings.
While the Russell 2000 had a rough week, it is still up almost 2% for the year as of Friday’s market close. In contrast, Goldman’s exchange-traded fund has outperformed the index, posting gains of nearly 8% in the same period. Tuorto believes that the interest rate-sensitive small-cap group is poised to catch up, especially with anticipated easing by the Federal Reserve. He sees potential in the semiconductor industry, highlighting Cohu and Onto Innovation as top picks in the space. Tuorto expects these companies to benefit from a recovery in chips and high-bandwidth memory, crucial for AI technology.
Consumer-facing stocks are also on Tuorto’s radar, as he predicts continued outperformance due to solid consumer spending trends. He specifically mentions Shake Shack and newly listed Cava as strong contenders in the restaurant industry. Tuorto praises the management teams of these companies for their focus on menu innovation, customer loyalty, and efficient real estate strategies. He notes that consumer behavior is diverse, and companies like Shake Shack and Cava have been successful in capturing consumer preferences and translating that into revenue growth.
Tuorto emphasizes the importance of careful selection within the small-cap universe, as there are many unprofitable companies within the Russell 2000 index. He advises investors to look for companies in the $2 to $5 billion range that have the potential to outperform. Despite the recent market turbulence, Tuorto remains bullish on small caps, particularly as financial conditions improve and the Federal Reserve signals possible easing. He believes that gaining clarity on interest rates will provide a positive tailwind for the small-cap group.
In conclusion, Goldman Sachs sees opportunities in small-cap stocks, with Tuorto’s actively managed ETF outperforming the Russell 2000 index. He recommends a selective approach to investing in small caps, looking for high-quality names beyond the benchmark index. Tuorto points to potential growth areas in the semiconductor industry and consumer-facing stocks, citing companies like Cohu, Onto Innovation, Shake Shack, and Cava as promising investments. Despite short-term market fluctuations, Tuorto remains optimistic about the prospects for small-cap stocks, especially as financial conditions improve and interest rates become clearer.
