Small-Cap Stocks: Poised for a Big Comeback

Exploring the Untapped Potential of Small-Cap Stocks in the Current Market Landscape

Editorial Team (ET)June 30, 2025

When it comes to investing, small-cap stocks often don't get the spotlight they deserve. Yet, according to Greg Tuorto, a portfolio manager at Goldman Sachs Asset Management, now might be the perfect time to dive into this often overlooked segment of the market. With the broader markets still dominated by large and mega-cap stocks, small-caps are showing signs of a promising "large catch-up trade."

Understanding Small-Cap Stocks

Small-cap stocks are shares of companies with relatively small market capitalizations, typically ranging from $300 million to $2 billion. These companies are often younger and less established than their large-cap counterparts, but they can offer significant growth potential.

Historically, small-cap stocks have shown the potential for substantial returns. However, they are also known for their volatility and higher risk. The Russell 2000 Index, which tracks the performance of small-cap companies, often experiences more dramatic swings compared to indices that track larger companies.

Current Market Scenario

So far this year, small-cap stocks have been lagging behind the broader market. While the S&P 500 has been buoyed by a few large-cap tech giants, small-caps have struggled to keep pace. Despite this, there is a growing sense among market strategists that small-caps are primed for a rebound.

Several factors have contributed to the underperformance of small-cap stocks. Economic uncertainty, inflationary pressures, and rising interest rates have all played a role. However, as the market gains more clarity on the Federal Reserve's rate hike trajectory, small-caps could see a significant upside.

The Argument for Small-Caps

Greg Tuorto believes that the time is ripe for small-cap stocks to shine. He notes that the bond market, often seen as an intimidating force, has had a pronounced impact on small-caps. Despite this, he argues that a "large catch-up trade" is on the horizon as rate certainty comes into play.

As the Federal Reserve's rate hike cycle becomes clearer, the market can adjust its expectations accordingly. For small-cap stocks, which are more sensitive to interest rate changes, this clarity can provide a much-needed boost.

Potential Risks and Rewards

One of the main challenges for small-cap stocks is navigating a higher-for-longer rate environment. Larger companies can more easily refinance their debt, but small-caps might struggle with higher borrowing costs. This makes the investment landscape for small-caps both challenging and rewarding.

Small-cap companies often don't have the same access to capital markets as larger firms. This can make refinancing debt more difficult and expensive. Investors need to be selective, focusing on companies with strong balance sheets and manageable debt levels.

Stock Picking in the Small-Cap Universe

Investing in small-cap stocks requires a more hands-on approach. While many investors use ETFs to gain exposure to small-caps, Tuorto argues that active stock selection is crucial. The small-cap universe is vast and varied, and not all companies are created equal.

Active investors can identify companies with strong growth prospects and avoid those with significant risks. This selective approach can lead to better returns and a more resilient portfolio.

Expert Opinions and Stock Picks

Greg Tuorto emphasizes the importance of being selective and actively managing small-cap investments. He believes that certain small-cap stocks have significant growth potential despite the current market challenges.

Featured Stocks: Boot Barn, TransMedics, DigitalOcean

Tuorto highlights several small-cap stocks that he believes are well-positioned for growth. Among these are Boot Barn, TransMedics, and DigitalOcean. Each of these companies has unique strengths and growth drivers that make them attractive investment opportunities.

Deep Dive into Featured Stocks

Boot Barn: A Closer Look

Boot Barn has been a standout performer, with its stock up over 70% year-to-date. The company's efficient growth strategy and strong performance metrics make it an attractive investment.

Boot Barn's focus on Western wear and workwear has resonated well with consumers. The company has also reported better-than-expected same-store sales, indicating robust demand and growth potential.

TransMedics: Innovative Solutions

TransMedics is at the forefront of medical technology, specializing in organ transplant solutions. The company's innovative products and growing market presence make it a compelling small-cap investment.

With an increasing demand for organ transplants, TransMedics is well-positioned to capitalize on this trend. The company's cutting-edge solutions and strong growth trajectory offer significant upside potential.

DigitalOcean: Empowering Developers

DigitalOcean provides cloud infrastructure services tailored for developers. Its simple, cost-effective solutions have made it a favorite among startups and small businesses.

DigitalOcean's focus on simplicity and customer service gives it a competitive edge in the crowded cloud market. The company's strong customer base and consistent growth make it a promising small-cap stock.

Small-Cap Investing Strategies

Investing in small-cap stocks can offer substantial long-term growth. While these stocks may be more volatile, their potential for higher returns makes them an attractive option for growth-oriented investors.

Small-cap stocks can also provide diversification benefits. Including small-caps in a portfolio can help spread risk and increase the potential for overall portfolio growth.

Conclusion

The future looks promising for small-cap stocks, especially as the market gains more clarity on interest rates. With careful stock selection and a focus on companies with strong fundamentals, investors can tap into the significant growth potential that small-caps offer.

Experts like Greg Tuorto believe that now is the time to consider small-cap stocks. Despite the challenges, the potential rewards make small-caps a compelling addition to any investment portfolio.

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