Goldman Sachs: U.S. stock rally will extend to small-cap stocks

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Strategists at Goldman Sachs said that, against a backdrop of resilient economic outlook, previously lagging small-cap stocks are set to catch up, further fueling the rally in the record-breaking U.S. stock market.

The strategist team led by David Kostin recently pointed out that the U.S. stock market rally so far has been driven by a small number of stocks, with narrow market breadth, leaving room for "catch-up" gains in sectors like small caps. They believe that the upcoming Fed rate-cutting cycle and a rebound in corporate earnings will increase the likelihood of the rally spreading from a few leading stocks to the broader market.

Goldman Sachs reiterated its year-end target for the S&P 500 Index at 6,600 points. This bullish view is echoed by other Wall Street peers. Michael Wilson of Morgan Stanley also expects U.S. stocks to rise further, noting that the U.S. economy is transitioning to an "early-cycle" phase that will support "durable and broad-based" corporate earnings recovery.

Despite optimistic market sentiment, last week's weaker-than-expected non-farm payroll report has stirred some investor concerns. Some believe that current market valuations have "priced in perfect expectations," and weaker economic data adds uncertainty to the outlook, with worries that the central bank may be waiting too long to cut rates.

Narrow Rally, Room for Rotation

Goldman Sachs believes that a major characteristic of the current U.S. stock market is that the rally is overly concentrated, which actually means there is now room for sector rotation.

As described by David Kostin in a report, since gains have been led by a few stocks, the median price of S&P 500 constituents is still 11% below its 52-week high. He wrote:

“Narrow market breadth suggests that in those lagging areas of the market, ‘catch-up’ trades still have room to continue.”

For specific rotation directions, Goldman Sachs explicitly pointed out the short-term potential of small-cap stocks. Kostin noted that the recent strong performance of the Russell 2000 Small Cap Index is further evidence that market rotation is underway. He believes that small-caps still have room to outperform the broader market in the short term.

However, this advantage may not last. Kostin also pointed out that he does not expect the strong performance of small-caps to persist over the next 12 months. This suggests that while market breadth may improve in the near term, investors should still remain cautious in terms of long-term positioning.

Wall Street Bulls Converge

Last week, U.S. stocks hit new all-time highs again, supported by investors’ confidence in the resilience of economic growth and expectations for Fed rate cuts. In addition, the AI boom continues to power tech heavyweight stocks.

Kostin maintains his forecast for the S&P 500, expecting the benchmark index to reach 6,600 by year-end, representing an upside of around 2% from current levels, and to rise another 6% by mid-2026. Notably, as changes in U.S. trade policy caused market volatility, Kostin and his team had swung between bullish and bearish views earlier this year.

Goldman’s optimistic outlook on U.S. stocks is echoed by other Wall Street firms. Michael Wilson of Morgan Stanley also expects further gains, though short-term volatility may intensify. He reiterated that the U.S. economy is transitioning to a so-called "early-cycle" stage, which will support a "durable and broad-based" recovery in corporate earnings.

However, not everyone is this optimistic. Lori Calvasina, a strategist at RBC Capital Markets, believes that last week's weak jobs data is unsettling the market. She thinks that in a market "priced for perfection," such data increases uncertainty.

Risk Warning and DisclaimerThe market has risks; invest cautiously. This article does not constitute personal investment advice and does not take into account any individual user's specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. Invest accordingly and at your own risk. ```