Small-cap stocks (^RUT) are on the move after the Federal Reserve initiated its highly anticipated interest rate cut. Goldman Sachs asset management portfolio manager Greg Tuorto joins Catalysts to discuss the outlook for small-cap stocks and some of his top picks as interest rates continue to fall.

"There's been a number of tailwinds for small caps that really have been ignored over the last couple of years as we've waited for this rate uncertainty. The economy is quite stable. It's still growing. I don't think that we're expecting a big downtick in the economy next year, that's good. It's a very domestic asset class, and the US is the best house in a number of bad neighborhoods. That's also quite good," Tuorto tells Yahoo Finance.

He points to areas like technology and healthcare with undervalued small-cap players. Tuorto notes that small caps have underperformed for nearly three years, which is much longer than the typical year-long down cycle. "There's a lot of pent-up opportunity in this space because what you've seen in terms of small-cap performance has not come from from multiple expansion. It's really come from the earnings. And we think that the earnings opportunity next year for small caps is better than it was in 2024. We think it's better than large caps," he argues.

As the Fed continues to ease rates, Tuorto won't be paying too much attention to the amount of rate cuts. "So many of our companies had to really understand how to operate under much higher rates. So I think that as you kind of think about where things are going, it's much more of a significantly more powerful tailwind than a normal rate cut cycle," he explains.

While software has been the sector avoided most during rate hikes, Tuorto believes now is an "interesting tactical time to get back in there." He expects more IPOs (initial public offerings) in the sector throughout the rest of 2024 as well as M&A (mergers and acquisitions) activity. He highlights DigitalOcean (DOCN) as one of his top software picks, noting there is a significant AI opportunity among small- and medium-sized businesses.

On the consumer side, he points to Shake Shack (SHAK), Ollie's (OLLI), and Boot Barn (BOOT) as small-cap opportunities investors should take advantage of.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl