Small-cap stocks are having a difficult time, even by this year’s bear market standard. But Goldman Sachs ‘ Peter Oppenheimer believes the worst could be over for smaller companies, and names several stocks he likes within the space. “Small caps are down 34% year-to-date. They have underperformed large caps by 20%. This is the worst start since the turn of the century,” Oppenheimer, Goldman’s chief global equity strategist, wrote in a note on Oct. 14 with colleagues including Guillaume Jaisson. There are several reasons for this, they said, including the impact of a weak domestic currency (such as the euro or British pound), lack of exposure to outperforming sectors and high cyclicality. Investors are also finding fewer opportunities for outsized returns — also known as alpha — within the small-cap space, which has traditionally been favored by stock pickers for its relative immunity to macro drivers, according to Oppenheimer. However, he explained that the sharp foreign exchange movements and negative growth outlook this year has led to a strong underperformance in small caps, causing the sector to become macro-driven as well. Investors hoping for a respite in the fortunes of small caps could be in for a longer wait, however. Read more Morgan Stanley’s Mike Wilson flags a key risk to earnings — and names the stocks to avoid Nearing retirement? Here’s how to allocate your portfolio right now, according to the pros As market volatility persists, Wall Street analysts say to sell these stocks “Our macro-outlook suggests that most of these problems will persist (albeit at a slower pace). That said, we would argue that a lot has been discounted,” he added. Oppenheimer said he does not expect the performance of small caps to improve before the broader market, which he believes has yet to bottom. He said a trough can only be reached with “genuinely low” valuations, an improvement in growth, a peak in inflation and interest rates, as well as negative positioning in stocks. “We are not decisively there yet. We do not think we have seen total capitulation: 2023 earnings estimates have only been revised down by 4%,” Oppenheimer said. Global stock picks While a turnaround in small caps may not be imminent, Oppenheimer believes the sector now looks “inexpensive.” “Our outlook would suggest that we will move from the Despair to the Hope Phase of the equity cycle in the next year. This radical shift should change their fortune — small caps tend to outperform in the Hope Phase with other Cyclicals, given that factors that underperform during a Despair Phase are usually the ones that outperform during the following Hope Phase,” he added. Oppenheimer said he is favoring small-cap companies with stable growth, strong balance sheets and good profitability. Goldman’s screen for such companies turned up retail names including Burberry and JD Sports . It also included French automotive supplier Valeo and chemicals companies Brenntag and Johnson Matthey . British financial services firm Hargreaves Lansdown and Finnish telecommunications firm Elisa also made Goldman’s list.