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

Recently, Wall Street has begun to have doubts about the strength and speed of the Fed's rate cuts. However, Goldman Sachs has reassured investors that 2025 will still be a "harvest year" for rate-sensitive assets, including small-cap stocks and bonds. The Fed began lowering short-term rates in September, with most investors expecting this loose policy to continue until 2025. However, there is disagreement in the market regarding the extent and pace of rate cuts. Influenced by October's Consumer Price Index (CPI) data and Fed Chairman Powell's cautious remarks, the market now sees the possibility of the Fed skipping a rate cut at the December 17-18 meeting increase from less than 20% last week to over 40%. A slower pace of rate cuts may put pressure on bonds, as bond prices move inversely to interest rates. However, Goldman Sachs Asset Management does not agree with this view in their outlook for 2025 released on Tuesday. Goldman Sachs stated, "Despite the uncertainty in economic trends expanded by the US election results, we still expect the Fed to continue cutting rates in December and early 2025." The company believes that there may be significant returns in bond portfolio allocations in 2025, 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 also crucial. In recent years, the US stock market has been mainly driven by large-cap growth stocks, especially in the field of artificial intelligence-related technology companies. However, Goldman Sachs warned that the market dominance of these giants may be difficult to sustain, and reminded investors to be cautious with passive index funds such as the S&P 500. In contrast, small-cap stocks may be worth more attention in 2025. Goldman Sachs pointed out that small-cap stocks are more sensitive to changes in interest rates because these companies usually have weaker financial positions and higher financing costs, thus they can benefit more from rate cuts. Although the Russell 2000 index of small-cap stocks has lagged behind the S&P 500 index by about 15% so far this year, small-cap stocks have more attractive valuations. Currently, small-cap stocks have a price-to-earnings ratio of around 15 times, while large-cap stocks are over 21 times. Goldman Sachs stated, "We expect a reversal of fortune for small-cap stocks in 2025, attributed to the valuation discount of small-cap stocks compared to large-cap stocks and the supportive rate cutting environment." Trump's victory in the presidential election is also a potential positive factor for small-cap stocks. Although rates have risen slightly after his victory, Goldman Sachs believes that his tariff plan may be more unfavorable for large multinational companies. Goldman Sachs pointed out, "Compared to large companies, small businesses rely more on domestic sources of income, have shorter supply chains, and are therefore more able to withstand the negative impacts of tariffs."