An under-the-radar corner of the stock market has the green light for a ‘powerful’ catch-up rally, Goldman Sachs portfolio manager says

An overlooked part of the stock market is poised for big gains.

That’s according to Greg Tuorto, a portfolio manager at Goldman Sachs Asset Management who says he sees a big “catch-up” rally coming for small-cap stocks.

He told CNBC in an interview on Thursday that that’s due to a confluence of bullish factors, including lower interest rates, a promising economic outlook, and the upcoming presidential election, which could boost confidence in the sector.

Tuorto noted that election years have historically led to strong gains for small-cap stocks. He sees the presidential election leading to positive developments in the economy, such as by increasing the supply of housing.

“Election years are usually positive catalysts for small-caps, and this has not been one of them. So there could be that powerful catch-up trade,” he said.

The interest rate environment looks favorable for small-cap firms, with central bankers issuing a jumbo-sized 50 basis point cut this week. Investors should expect two more rate cuts by the end of the year, Tuorto predicted, which should help ease financial conditions and boost investor confidence.

Lower rates, combined with expected improvement in corporate earnings, could all lead to a boost in IPO and merger activity, another tailwind for small-caps, he added.

The economy also looks poised to avoid a recession — another positive for small-cap firms, Tuorto said. GDP is estimated to run at 3% this quarter, according to the latest Atlanta Fed GDPNow reading, indicating solid growth for the economy.

“We’ve been waiting for this rates certainty. I think we also wanted to have a picture of whether we’re going to get a soft landing, which I think kind of puts us more firmly in that camp,” Tuorto said. “With the economy chugging along…it’s a really nice backdrop for small caps.”

Still, he cautioned that investors need to be picky, as not every small-cap name will be a winner.

“I think if you have that active, selective approach towards the small-caps space, you can not just outperform, but you can see some powerful upside momentum.”

Other forecasters have turned more bullish on small-cap stocks, despite the sector having a volatile year in 2023. Fundstrat’s Tom Lee predicted small-caps could rally as much as 40%, thanks largely to easier Fed policy.

The Russell 2000 surged 2% after the Fed cut interest rates on Wednesday, with the small-cap index up 12% year-to-date.