The free lunch is over
Small caps have been on a heater, but Goldman Sachs Asset Management is tapping the brakes. Tim Urbanowicz says the run has already eaten a big chunk of the easy gains, and from here on out the story has to be about real growth and lower rates — not just vibes and momentum.
Why the rally may cool off
A big reason smaller stocks surged was the AI boom. According to the article, about 40% of year-to-date gains came from AI infrastructure names riding the hyperscaler spending wave. But after the Russell 2000 rebalance, that AI exposure got cut roughly in half, from 15% to 7%. In other words: the turbocharger got unplugged.
Meanwhile, valuations aren’t looking nearly as cheap as they did earlier this year, which makes it tougher for investors to keep paying up for the same trade. If you were hoping for a painless second act, Goldman is gently reminding you that markets do not, in fact, care about your hopes.
Rates: the next boss fight
Urbanowicz says small caps now need two things to keep climbing:
- cyclical growth
- interest-rate relief
That second one matters a lot because small companies are carrying a heavy debt load, especially floating-rate debt. The article says interest expense is running at 31% of EBITDA for Russell 2000 companies, which is a not-so-fun way of saying borrowing costs are eating a huge slice of the pie.
Big picture: if the Fed stays on hold and the economy avoids a nasty slowdown, small caps can still work. But the days of just buying the index and assuming the market will do the rest? Goldman says that easy money era is done.