Small Caps Predicted To Surpass S&P 500 With 15% Upside In 2024

The equity research team at Goldman Sachs has forecasted a promising outlook for U.S. small-cap stocks in the coming year. Their recent client note has brought attention to an expected surge in the Russell 2000 index, which is tracked by the iShares Russell 2000 ETF (IWM). The analysis predicts a return of around 9% over the next half year and an impressive 15% over the full year.

Comparatively, their projections for the large-cap S&P 500 are more conservative, with an expected increase of 7%, hitting a target of 5,100 by year-end 2024. This forecast also includes a total return of 9% when factoring in dividends.

Key Drivers Behind Russell 2000's Projected Performance

A range of factors are contributing to the positive outlook on the Russell 2000's performance. First, the growth potential is supported by its current low valuations coupled with a robust economic forecast. Statistics have shown that valuations and real U.S. economic growth have historically influenced the index's 12-month returns by almost two-thirds.

Next, when compared to its peak in November 2021, the Russell 2000 is still trading about 20% lower, while the S&P 500 is just slightly below its all-time high from January 2022. This gap indicates the untapped potential in small-cap stocks.

Investments in macro products like futures and options have predominantly driven recent uptrends in the Russell 2000 rather than direct stock purchases. This change in investment behavior is evidenced by an investor shift in net positions in Russell 2000 futures from $5 billion short to $4 billion long.

Additionally, U.S. economic progress has been identified as a pivotal force in propelling small-cap returns. The Russell 2000 has reacted more sensitively to economic growth shifts than to interest rate changes since 2010, displaying stronger dynamism when compared to indices like the S&P 500 or the Nasdaq-100.

The likely 15% return mirrors the median historical return of the Russell 2000 in presidential election years. In the past, the index has generally posted gains in seven out of 10 presidential election cycles, often outpacing the S&P 500.

Potential Risks to Small Caps

Despite the optimistic forecast, the Goldman Sachs team, headed by analyst Ben Snider, has also cautioned investors on potential risks. The small-cap sector might fall behind if there is an unexpected downturn in economic growth. Furthermore, a sudden spike in interest rates could pose a threat, particularly with the Russell 2000's substantial exposure to sectors such as Biotech, Banks, and Real Estate.

From valuations, economic signs, investor behavior, macroeconomic factors, and historical patterns in election years, these elements all combine to support the anticipation of small caps outshining larger caps in the year to come. However, as always, investors are advised to consider the inherent risks in tandem with these forecasts.

Small-Caps, Forecast, Performance