Goldman Sachs: The Markets
2026-04-27 · Hosted by — · Goldman Sachs
Executive Summary
Chris Hussey speaks with Greg Torto, head of the small and SMID cap team at Goldman Sachs Asset Management, about the small-cap opportunity. Torto argues small caps are 25-30% cheaper than large caps, benefiting from an improving earnings cycle, reviving M&A and IPO activity, and picks-and-shovels exposure to AI through semiconductor capital equipment and optical connectivity. He favors biotech, semi/semi-cap equipment, and defense innovation as top trades.
Key Stories & Changes
1. Small-Cap Valuation and Earnings Tailwind
Small caps are 25-30% cheaper than large caps on valuation
Earnings cycle in small caps expected to be more powerful than large-cap earnings cycle
Small caps were up 10% in January, historically a bullish signal for full-year returns
First meaningful inflows in the small-cap space in several years beginning to materialize
2. AI Picks-and-Shovels Opportunity in Small Caps
Semiconductor capital equipment went from “nowhere two years ago” to a leading sector
Optical connectivity needed to link data centers presents multiple investment flavors
Memory costs rising due to large language models, creating demand across the supply chain
Software has not joined the party; semi and semi-cap have led
3. Sector Favorites: Biotech, Defense, Semi-Cap
Biotech seeing gradual beginning of IPO cycle after being “dead” since 2021
Defense innovation with new public companies beyond just drones — components, connectivity
Semi and semi-cap equipment benefiting from manufacturing reshoring theme
4. Rate and Banking Environment
Smaller banks still “fighting for deposits” — rates not yet low enough to differentiate
Payment and insurance sectors seeing more relief from rate dynamics
Financial conditions generally easy; no accidents in private credit yet
Would be “nice to see a cut” but not surprised if none comes near-term
Trends Identified
1. Small-Cap Renaissance Driven by Domestic Themes
After three to four tough years starting when the Fed began raising rates, small caps are benefiting from a convergence of lower rates, reviving M&A, and the reshoring/manufacturing theme that favors domestically oriented companies. The Russell 2000’s domestic tilt positions it well for tariff-driven manufacturing shifts back to the U.S.
2. AI Investment Broadening Beyond Mega-Cap
The AI investment thesis is expanding into small-cap territory through picks-and-shovels plays in semiconductor capital equipment, memory, and optical connectivity. This represents a maturation of the AI trade from moonshot hype into longer-duration infrastructure investment opportunities.
3. Biotech and Defense IPO Revival
After a boom in 2020-2021 and years of dormancy, biotech and defense innovation are seeding a new IPO cycle. Companies led by experienced repeat founders are exploiting areas that are under-followed, creating opportunity for small-cap investors positioned in these sectors. —-
Sentiment Analysis
Overall Market Sentiment: Constructively Bullish
Torto is enthusiastic about the small-cap opportunity, seeing multiple catalysts converging after years of underperformance, though acknowledging economic output must be watched closely.
Risk Factors Highlighted
Energy crisis impact on small caps: Economic output must be watched closely as the energy crisis could weigh on transportation and other cost-sensitive sectors
Software sector weakness: Persistent underperformance in software could drag on broader small-cap sentiment if it continues
Rate uncertainty: Direction of rates still unclear; smaller banks not yet benefiting enough from the current rate environment
Consumer spending durability: Recovery from “initial stages of the war” needs confirmation through proof points in restaurant and retail spending
Earnings expectations mismatch: Healthcare showing some weakness; expectations must match reality as earnings season intensifies
This episode was covered in today’s The Market Signal — 2026-04-27, a cross-source synthesis of multiple podcast reports.