According to Goldman Sachs strategists, a massive reversal of momentum favoring small-cap stocks over large-caps is likely to continue.
Last week, small-caps posted a record weekly performance versus large-caps, attributed to several factors, including a slowdown in inflation and anticipation that the Federal Reserve could lower interest rates in September.
Moreover, consistent economic growth data and an increase in the likelihood of a Republican majority in the next elections have contributed to this reversal.
“Small-cap companies tend to be highly sensitive to the US economic growth environment and clearly outperformed following Trump's election in 2016. Small-cap companies are also more domestically oriented than large-cap companies and are less vulnerable to tariffs,” the analysts wrote in a report.
The investment banking giant also pointed to a compression in the earnings per share (EPS) growth premium of large-cap stocks relative to their smaller peers as a significant factor.
“The recent trend of small-cap outperformance will likely persist unless the macro environment changes substantially or large-cap tech stocks report second-quarter results that cause analysts to raise revenue forecasts for the coming quarters.”
The report also noted that investors are showing concern about the sales projections of large technology companies, known as hyperscalers.
“Investors are increasingly concerned about the prospect of “overinvestment” in ai, especially among the four hyperscalers (AMZN, META (NASDAQ:), MSFT and GOOGL).
“(These companies have dramatically increased their planned spending on ai initiatives over the past six months, but it's unclear when that will pick up: 2027, 2028, 2029, or perhaps never?”)
This lack of growth in sales estimates is seen as a potential limiter on the performance of these large-cap technology stocks.
“The potential resumption of ai trading (and, by extension, a reversal of the recent underperformance of large-caps versus small-caps) will depend on earnings revisions.
“Outperformance will resume if big tech beats and raises future sales expectations. If not, small-caps will continue to outperform,” the brokerage firm concluded.
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