Goldman Sachs Highlights Importance of Nominal Growth for Small-Cap Stocks

Goldman Sachs has emphasized that the key factor for small-cap stock performance is the health of nominal economic growth rather than the level of the 10-year Treasury yield. The bank's analysis indicates that small caps tend to thrive when nominal GDP, which combines real growth and inflation, exceeds 5% and is accelerating. Currently, nominal GDP is estimated to be around 6% year on year, with real GDP at approximately 2.3%.

The investment bank noted that small-cap stocks have historically delivered positive returns even during periods of rising interest rates. Goldman Sachs expects U.S. economic growth to remain steady at about 2.3%, with unemployment around 4% and a low risk of recession. Additionally, purchasing managers' indices have reached their highest levels in over five years, suggesting a robust economic backdrop for small-cap companies.

Goldman Sachs also pointed out that inflation appears to be more concentrated in energy prices, which could affect broader inflation trends. The bank believes that the current valuations of small-cap stocks are attractive compared to large-cap stocks and historical averages, presenting a favorable entry point for investors. Furthermore, the rising cost of capital is expected to reward companies with strong profitability and durable earnings, enhancing opportunities for active stock selection.

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Source: KLEA News