Episode summary
Big Opportunities in Small Cap Equities
The Markets
· · 10 min · Hosts: Chris Hussey · Guests: Greg Tuorto
Summary
Small-cap equities have had several years of underperformance, but Greg Tuorto argues the setup is improving as rates stabilize and a stronger earnings cycle emerges. He says small caps are still materially cheaper than large caps, with valuations about 25% to 30% lower, and sees additional support from a pick-up in M&A and the possibility of an IPO reopening that could expand the opportunity set.
Tuorto also says the small-cap market is no longer as economically sensitive as it once was, though he would watch transportation most closely if energy costs stay elevated. He thinks the consumer looks better than the market has given it credit for, and that signs of strength there would suggest the economy is healthier than investors assume.
On sector themes, he favors “picks and shovels” exposure to AI rather than the moonshot software trade, pointing to semiconductors, semiconductor capital equipment, optical connectivity, and memory-related businesses. He also highlights biotech, defense, and parts of the domestic manufacturing supply chain as areas where small caps can benefit from onshore innovation and changing spending patterns.
Key takeaways
- Tuorto says small caps are still 25% to 30% cheaper than large caps and now have a stronger earnings and M&A backdrop.
- He expects the AI opportunity in small caps to show up more in semiconductors, memory, and data-center infrastructure than in software.
- Tuorto sees biotech as a tradeable theme because M&A is restarting and the IPO cycle may be gradually reopening.
- He says rates are not low enough yet to create a big banking call, but they are less of a headwind for payments and insurance.
- He thinks defense, semi-cap equipment, and other domestic manufacturing names could benefit from a renewed U.S. industrial buildout.
Notable quotes
“We think it's been three, three or four, tough years in the small-cap space starting when the Fed started raising rates”
“We also think they're a lot cheaper. About 25 - 30 percent cheaper than large-caps”
“I do think that the picks and shovels side can be a little bit more of a long duration way, to kind, of harvest some gains”
“I like biotech. I'll talk my book there. Semi and semi-cap. You know? And the defense space”
“I do think that there's a big change going on in the way we spend money in the defense industry”
How the episode opens
This is The Markets. I'm Chris Hussey and today is Thursday, April 23rd. And my guest is Greg Tuorto, who is head of the small and smid-cap team in Goldman Sachs Asset Management.
Greg, thanks so much for joining us. Thanks for having me. All right, Greg, an interesting time here for small caps.
You know, the world has really gone mega-cap tech. And yet, at the same time, we've seen some small-cap outperformance. What exactly is going on here?
Is it still a good time to be in the small-cap space? We think so. We think it's been three, three or four, tough years in the small-cap space starting when the Fed started raising rates.
And we really haven't gotten the tailwind fully from the cutting in rates you expect. You know? We're starting to see a nice earnings cycle in small caps.
We think it'll be a lot more powerful than the large-cap earning cycle. We also think they're a lot cheaper. About 25 - 30 percent cheaper than large-caps.
Plus, you have the optionality in the IPO market, which should help. And M&A is starting to pick up, which is also a really nice, you know, tailwind for the small-cap market. So, lower rates, better M&A creating a little bit of a rotation in the small caps now.
Is that what has been driving this year-to-date outperformance? We think so. We think that there's also, you know, a little bit of animal spirits.
You know, there can be big moves that come in the small-cap market that you can capture both alpha and beta. I also think, you know, if you want to put on your stock trader's almanac hat, right, you know, the Yale Hirsch guide, you know, when you have a really nice move like small-caps were up 10 percent in January, usually that means it's going to be a pretty nice, absolute return year.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- small cap equities
- us small smid cap
- market rally outlook
- macro volatility
- investment opportunities
Companies and tickers mentioned
- GS
- Goldman Sachs Asset Management
- Goldman Sachs
Watch the episode
Watch “Big Opportunities in Small Cap Equities” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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