Tim Urbanowicz, the head of research at Goldman Sachs, said the pace of outperformance for small-cap stocks will moderate through the end of the year.
This projection comes as investors evaluate whether the recent surge in smaller companies is sustainable or if the market is shifting back toward larger entities. The trend reflects broader concerns regarding interest rates and their specific impact on smaller firms.
Speaking from the CNBC Power Lunch studio, Urbanowicz said the current state of small-cap stocks and the variables driving their valuation. The analysis follows a period of significant growth for the sector, which has seen a notable shift in momentum relative to large-cap equities.
According to data, small caps experienced their best first half since 1991 [1]. This historical benchmark highlights the scale of the recent rally and the intensity of the market's move into smaller assets earlier this year.
"Small caps' pace of outperformance will moderate through year end," Urbanowicz said.
While the outlook suggests a slowing pace, the discussion centered on the role of interest rates. Small-cap companies often have different debt profiles and capital requirements than their larger counterparts, making them more sensitive to shifts in monetary policy. Urbanowicz's assessment suggests that while the trend remains positive, the rapid acceleration seen in the first half of the year is unlikely to continue at the same velocity.
“Small caps' pace of outperformance will moderate through year end.”
The shift toward a moderate pace of growth indicates that the 'catch-up' trade—where investors move money from overpriced tech giants into undervalued smaller companies—may be reaching a point of equilibrium. If the pace slows as predicted, investors may seek more diversified portfolios to hedge against interest rate volatility that disproportionately affects small-cap borrowing costs.
