An under-the-radar corner of the stock market has the green light for a ‘strong’ recovery rally, says Goldman Sachs portfolio manager

• Small-cap stocks are poised for significant growth, said Greg Tuorto of Goldman Sachs.

• The portfolio manager pointed to lower interest rates and a promising economic context for small caps.

• The presidential election could also be a positive catalyst, leading to a recovery rally, he said.

An overlooked part of the stock market is poised for big gains.

That’s according to Greg Tuorto, a portfolio manager at Goldman Sachs Asset Management, who says he sees a big “recovery” rally for small-cap stocks.

He told CNBC in an interview Thursday that this is due to a confluence of upbeat factors, including lower interest rates, a promising economic outlook and the upcoming presidential election, which could boost confidence in the sector.

Tuorto noted that election years have historically led to strong gains for small-cap stocks. He sees the presidential election leading to positive developments in the economy, such as increased housing supply.

“Election years are usually positive catalysts for small caps, and this was not one of them. So there could be that strong catch-up trade,” he said.

The interest rate environment looks favorable for small caps, with central bankers issuing a 50 basis point cut this week. Investors should expect two more rate cuts by the end of the year, Tuorto predicted, which should help ease financial conditions and boost investor confidence.

Lower rates, combined with the expected improvement in corporate earnings, could all lead to an increase in IPO and merger activity, another tailwind for small caps, he added.

The economy also appears poised to avoid a recession — another positive for small-cap firms, Tuorto said. GDP is expected to be 3% this quarter, according to the Atlanta Fed’s latest GDPNow reading, indicating solid economic growth.

“We’re waiting for that rate certainty. I think we also wanted to have a picture of whether we’re going to get a soft landing, which I think puts us more firmly in that camp,” Tuorto said. “With the booming economy … it’s a very nice backdrop for small caps.”

Still, he cautioned that investors need to be picky because not every small-cap name will be a winner.

“I think if you have that active and selective approach to the small-cap space, you can’t just outperform, but you can see strong positive momentum.”

Other forecasters turned more bullish on small-cap stocks, despite the sector having a volatile year in 2023. Fundstrat’s Tom Lee predicted small-caps could rise as much as 40%, largely due to policy Fed easier.

The story continues

The Russell 2000 rose 2 percent after the Fed cut interest rates on Wednesday, with the small-cap index up 12 percent year to date.

Read the original article on Business Insider