The record-breaking rally in US stocks is set to extend as laggards including small caps play catch-up amid a resilient economic outlook, according to Goldman Sachs Group Inc. strategists.
The team led by David Kostin said a limited group of stocks had driven gains so far, with the median constituent in the S&P 500 Index remaining 11% below its 52-week high. Expected Federal Reserve interest-rate cuts and a pickup in corporate earnings increase the chances of the rally broadening to areas such as small caps, they said.
“Narrow market breadth indicates there is still room for ‘catch up’ trades to continue in pockets of the market that have lagged,” Kostin wrote in a note.
The strategist is among a cohort of Wall Street forecasters who flipped between bullish and bearish views this year as US trade policy caused market volatility. In the latest note, Kostin reiterated a year-end target for the S&P 500 of 6,600 points, implying gains of 2% from current levels. He expects the benchmark to climb 6% by mid-2026.
US stocks hit their latest all-time high last week, driven by optimism around economic growth and expected Fed rate cuts. The buzz around artificial intelligence has also boosted technology heavyweights.
Still, a weaker-than-expected jobs report last week stirred worries among investors that the central bank has waited too long to reduce borrowing costs. RBC Capital Markets strategist Lori Calvasina said the soft data was raising uncertainty in a stock market that’s “priced for perfection.”
At Goldman Sachs, though, Kostin said Fed rate cuts at a time when the economy avoided a recession usually led to more gains in the S&P 500. A recent outperformance in the Russell 2000 index of small-cap stocks is further evidence of a rotation, he said.
While there is still scope for small caps to fare better in the near term, Kostin said he doesn’t expect that to continue over the next 12 months.
Morgan Stanley’s Michael Wilson also expects further gains in US equities even if moves turn more choppy in the near term. He reiterated that the US economy is transitioning to a so-called “early cycle” stage, which would support a “durable and broad” earnings recovery.
