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US smallcap stocks attractive for 2022, says Goldman Sachs; equities will continue to outperform fixed income

US small cap stocks have outperformed large cap stocks over the past two decades, and the same might continue in 2022

US Stock market
Apart from the high growth factor, smallcap and midcap stocks have also historically outperformed in rising interest rate environments. (Image: REUTERS)

US small cap stocks have outperformed large cap stocks over the past two decades, and the same might continue in 2022, analysts at Goldman Sachs said. “We believe smallcap stocks can continue to outperform in 2022. The expectation for earnings growth of Russell 2000 companies in 2022 is 30%, well above the 9% forecast for the S&P 500,” analysts said in a report. Since March 2020, the Russell 2000 index, which is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index, has zoomed 102%. On the other hand, the largecap S&P 500 has gained 95%.

Why Russell 2000

Analysts at Goldman Sachs said that in addition to thematic funds, US small caps may also offer exposure to many secular growth themes in 2022. “The vast majority of high-growth companies in the US are small caps and midcaps,” Goldman Sachs said. In the Russell 2000, Growth universe technology and health care companies account for almost 50% of the index, and the industrial sector and consumer discretionary sector make up about 30%.

Apart from the high growth factor, smallcap and midcap stocks have also historically outperformed in rising interest rate environments. The US Federal Reserve is now expected to raise interest rates soon to control the rising inflation in the United States.

Small Caps offer diversification

“Small caps offer not only potential growth but diversification — to companies outside of the large-cap universe and away from the high concentration currently in the S&P 500, where over 20% of the index is dominated by five mega cap stocks,” Goldman Sachs said. Meanwhile, the top 5 stocks in the Russell 2000 account for just 2% of the index by weight. “US small-cap value stocks are also significantly cheaper than large caps, which is unusual. As of December 31, 2021, the Russell 2000 Value index is trading at a 25% discount to the S&P 500 index on 12-month forward earnings compared to a 3% premium, on average, over the last 10 years,” they added.

Stocks better than fixed income assets

In 2022, stock returns are expected to be relatively lower than last year but still higher than returns from fixed-income assets. The rising inflation in the US, now near a 40-year high, the low-interest era is expected to end soon and give way to an increase in interest rates. “Equities have historically outperformed inflation and we believe this will be the case in 2022 as many companies are successfully passing through price increases,” Goldman Sachs said.

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