With fed fund futures reflecting a 100% probability of an interest rate cut in September and additional easing in December, small-cap stocks are poised to see more gains, according to Goldman Sachs' David Kostin. The small-cap benchmark Russell 2000 jumped 2% on Tuesday, heading for its fifth straight winning day. Investors' optimism around the prospect of rate cuts has been fueled by an unexpected 0.1% decline in the consumer price index reading for June. Federal Reserve Chairman Jerome Powell also said on Monday that the central bank won't wait for inflation to reach its 2% target rate before it begins cutting. Small-cap companies are especially sensitive to rate policy, as their financing costs rise when interest rates are high. Falling rates could be a boon for these names, said Kostin, Goldman's chief equity strategist, on CNBC's " Squawk on the Street ." "That historically has been a benefit for small-cap companies where basically 30% of their borrowings are in the floating-rate form, and therefore lower interest rates, lower interest expense, higher earnings estimates would be a consequence of that," he said. Small caps have been on a tear over the past month. In that period, the Russell 2000 Index has added more than 11%, compared with the S & P 500 's 4% advance. .RUT .SPX 1M mountain Russell 200 Index vs. S & P 500, 1-month Kostin also added that the largest tech companies could also see their valuations come down, which may also contribute to the broadening of the market. "Another way to think about it is the premium growth that's expected in some of the largest tech companies is likely to narrow going forward, meaning the expectations of revenue growth, of margins, that's likely to be less dramatically above the forecast for the typical stock," he said. "As that narrows, you'll likely see more of a compression in valuations." The top strategist expects the market to continue broadening through the end of the year. In 2024, the S & P 500 has surged more than 18%, while the Russell 2000 has added 10%.
