Greg Tuorto on Why Goldman Sachs is Bullish on Small Caps Despite Volatility

Small Caps Remain Attractive Despite Fed Policy Uncertainty

• 💡 Despite volatility and questions surrounding Fed rate cuts, Goldman Sachs Asset Management sees strong catalysts for small-cap companies.
• 🧠 The portfolio manager believes the job market's concerns may outweigh inflationary pressures, leading to eventual rate cuts, though not necessarily at the next meeting.
• ✅ Small-cap companies have demonstrated resilience by creating their own growth paths, showing a stronger earnings trajectory than large caps, especially after Q3.

M&A and IPO Market Trends

• 🚀 The "animal spirits" trade is live, with a significant uptick in strategic M&A, which typically offers higher valuations for small-cap targets.
• 📈 The biotech sector is active, potentially fueling a recovery in the IPO market, with an expectation for more smaller IPOs as valuations become more manageable than for mega-cap tech.
• 💡 The IPO market may see a return of smaller offerings, as pricing extremely high valuations like OpenAI's is more challenging for equity capital markets teams.

Emerging Sector Opportunities

• 💻 While software may not be the primary growth area, semiconductor companies involved in AI buildouts and networking infrastructure show promise.
• ✈️ The defense and aerospace sectors are also expected to capture attention due to increased global defense budgets and remaking of supply chains.
• 📉 Consumer-facing names and restaurants have struggled, with aggressive opening plans not being rewarded, suggesting a need for more concept-based, bottom-up strategies.

AI's Impact on Small and Large Companies

• 🔬 Small-cap companies can leverage AI effectively, with examples like RadNet using AI to assist radiologists and Digital Ocean enabling smaller companies to adopt AI tools.
• 💰 Unlike large corporations that can invest heavily in AI for their employees, smaller companies need more effective and cost-efficient AI utilization strategies to boost productivity.

Research and Investment Strategy

• 🔍 Goldman Sachs employs a large and dedicated team to build a backlog of investment ideas, moving beyond traditional IPO calendars.
• 💻 The team utilizes technology like Zoom for more productive company meetings, allowing for a deeper understanding of potential investments.
• ⚡ Holdings like Standex International and Myrr group highlight a focus on companies in areas like energy transmission infrastructure, which can indirectly benefit from AI-driven energy demands.