Russell 2000 Small-Cap Index Set to Beat S&P 500 in 2024, Goldman Sachs Says

Analysts at Goldman Sachs predict that the Russell 2000 index will return about 9% over the next six months and 15% over the next twelve months. According to Goldman's projection, the large-cap S&P 500 would rise by 7% by the end of 2024, to close at 5100 (a total return of 9% including dividends).

While the S&P 500 is less than 1% behind its January 2022 record, the Russell 2000 is still roughly 20% below its peak from November 2021, despite a substantial rally in recent months.

Although US economic growth is believed to be the main driver of small-cap gains, these companies have shown growing sensitivity to interest rates over the last two years.

The Fed held interest rates steady at the end of the latest policy meeting, with officials flagging plans to start gradually cutting borrowing costs in 2024, which should eventually bring relief on borrowing costs. The U.S. central bank's actions have boosted optimism about a "soft landing" in which inflation continues to slope down to the Fed's 2% target without a sharp rise in unemployment or a contraction in economic activity.

The U.S. small business sentiment was instantly boosted by the meeting results. The National Federation of Independent Business (NFIB) index rose to 91.9 in December from November's 90.6. It was the first increase since July and matched that month's reading.

The Wall Street most worried issue: A rash of bankruptcies caused the surge in interest rates hasn't prompted. Data compiled by the American Bankruptcy Institute (ABI) on the type of bankruptcies declared by small companies shows these filings have edged up over the past year, said Soneet Kapila, ABI's current president, "but the main cause may be a combination of general economic pressure from poor business performance," not interest rate pressures.

The Russell 2000 price-to-book multiple shows that small-cap stocks are currently trading at cheap valuations in comparison to historical levels, which is another point made by Goldman's analysts.

Although the analysts acknowledge that a decline in investor expectations for US economic growth poses the biggest danger to the small-cap outlook, they also point out that the lower values provide a safety net for the Russell 2000 even in the event of slower-than-expected growth.