Goldman Sachs still expects the Federal Reserve to continue cutting interest rates, and small-cap stocks deserve more attention

According to the Zhitong Finance APP, recently, Wall Street has begun to express doubts about the magnitude and pace of interest rate cuts by the Federal Reserve. However, Goldman Sachs has indicated to investors that 2025 will still be a "harvest year" for interest rate-sensitive assets, including small-cap stocks and bonds.

The Federal Reserve started lowering short-term interest rates in September, and most investors expect this easing policy to continue until 2025. However, there are differences in the market regarding the extent and pace of rate cuts. Influenced by the October Consumer Price Index (CPI) data and cautious statements from Federal Reserve Chairman Jerome Powell, the market believes that the likelihood of the Federal Reserve skipping a rate cut at the December 17-18 meeting has surged from 20% at the beginning of last week to over 40%.

A slowdown in the pace of rate cuts could put pressure on bonds, as bond prices move inversely to interest rate trends. However, Goldman Sachs Asset Management does not agree with this view in its 2025 outlook released on Tuesday.

Goldman Sachs stated, "Despite the uncertainty surrounding the economic trajectory due to the U.S. election results, we still expect the Federal Reserve to continue cutting rates in December and early 2025."

The company believes that portfolio allocation to bonds in 2025 may yield substantial returns, especially in areas such as corporate bonds and securitized credit where opportunities have been identified.

For stock market investors, the significance of rate cuts is equally important. In recent years, the U.S. stock market has been primarily driven by large-cap growth stocks, particularly large technology companies in the artificial intelligence sector. However, Goldman Sachs warns that the current market dominance of these giants may be difficult to sustain and advises investors to be cautious with passive index funds like the S&P 500.

In contrast, small-cap stocks may deserve more attention in 2025. Goldman Sachs points out that small-cap stocks are more sensitive to interest rate changes because these companies typically have weaker financial conditions and higher financing costs, making them more likely to benefit from falling interest rates.

Although the Russell 2000 index of small-cap stocks has risen only about 15% this year, significantly lagging behind the S&P 500 index's approximately 25% increase, small-cap stock valuations are more attractive. Currently, small-cap stocks have a price-to-earnings ratio of about 15 times, while large-cap stocks exceed 21 times.

Goldman Sachs stated, "We expect small-cap stocks to experience a turnaround in 2025, benefiting from the valuation discount of small-cap stocks compared to large-cap stocks and a supportive rate-cutting environment."

Trump's victory in the presidential election is also a potential positive factor for small-cap stocks. Although interest rates have risen following his victory, Goldman Sachs believes that his tariff plans may be more detrimental to large multinational companies.

Goldman Sachs noted, "Compared to large enterprises, small businesses have a greater concentration of revenue sources domestically and shorter supply chains, making them more resilient to the negative impacts of tariffs."