The Russell 2000 can swing past the S&P 500 over the coming year, but it all depends on its ability to weather certain headwinds, a Goldman Sachs report said on Wednesday.
According to model based on US economic growth and starting valuations, the small-cap index should gain 14% in the next 12 months. Meanwhile, the S&P 500 is expected to climb 9% in that span.
That would mark a rare role reversal as the S&P 500 typically outperforms the Russell 2000. However, the small-cap index’s potentially bigger returns also carry more risk, the note said.
Goldman outlined three near-term macro headwinds the Russell 2000 faces:
1. Rising interest rates
The index is more vulnerable to monetary tightening as listed companies tend to be more burdened by debt when compared to those of the S&P 500. As interest rates keep rising, debt servicing costs may gradually add pressure on small caps, as nearly one-third of the Russell 2000’s debt is floating rate.
This may become a complication through the rest of the year, as the Federal Reserve has indicated the possibility of two more hikes. For its part, Goldman anticipates one more hike in July, and forecasts cuts for 2024.
