Small caps are poised for growth despite Fed uncertainty – analyst

Goldman Sachs Asset Management portfolio manager Greg Tuorto remains bullish on small cap stocks (IWM), (SP600) despite recent selloffs triggered by uncertainty around Federal Reserve interest rate cuts.

In an interview with CNBC, Tuorto highlighted multiple catalysts in the small cap space that make these investments attractive even if the Fed doesn’t cut rates at its next meeting.

“We have not had a linear path for Fed cuts for the past three years,” Tuorto noted.

He emphasized that many small cap companies have “tried to make their own weather” and have shown “a really good earnings path” coming out of the third quarter, making them more attractive than large caps.

Strategic mergers and acquisitions activity represents a significant opportunity for small cap investors, according to Tuorto.

“The animal spirits trade is live,” he said, pointing to increased strategic M&A activity that typically comes with higher prices, particularly in the biotech sector. This M&A momentum could also help revitalize the IPO (IPO) market, especially for smaller offerings.

Tuorto identified several promising sectors including semiconductors (SMH), (SOXX), (XSD) related to AI infrastructure, defense, and aerospace (ITA), (XAR), (PPA). He specifically mentioned portfolio holdings like RadNet (RDNT), which utilizes artificial intelligence to help radiologists read images faster, and DigitalOcean (DOCN), a small cap software company focused on bringing AI capabilities to small businesses that cannot afford extensive AI investments.

By contrast, consumer-facing businesses continue to struggle, with Tuorto noting that “the restaurant space has kind of struggled with a lack of traffic.”

His investment approach emphasizes thorough research and building a “backlog of ideas” rather than relying on IPO calendars, with his team leveraging technology like Zoom (ZM) to conduct more efficient company research.

Small-Cap ETFs: (IJR), (IWM), (VB), (VBR), (VBK), (SCHA), (SPSM), and (DFAS).