Many small-cap stocks have fallen in 2022 as sharply rising costs hit profits, but the situation is reversible, Goldman said, providing an opportunity for investors if they know where to look. “With inflation expected to be moderate, companies are likely to stabilize at a minimum gross margin this year and expand,” analyst Deep Mehta said in a research note. they go beyond that in a meaningful way in our opinion.” The consumer price index has fallen from a peak of 9.1% in June last year, but remains high. In December, consumer prices rose 6.5% year-on-year. Economists are expecting this trend to continue as the Federal Reserve raises interest rates to defuse the situation. Inflation and Fed rate hikes have weighed on stocks. Last year, the Russell 2000 index fell 22% from 2021, its worst annual performance since 2008. By scanning small-cap stocks underperformed by rapidly rising costs affecting earnings, investors can easily find stocks that are likely to offer the greatest gains in energy, transportation, and other materials prices. Goldman screened small-cap stocks that are expected to have expanded gross margins through 2024. The bank found companies that reported gross margins that fell by more than 50 basis points, and companies that can have gross margins increase by at least 100 basis points between 2022 and 2024. One basis point is 0.01 of a percentage point. The following names show the biggest gains between the two time periods, making them Goldman’s pick as inflation decelerates. Allegiant Travel, the parent company of low-cost carrier Allegiant Air, is expected to see its profit margins increase. Airlines were hurt by rapidly rising energy costs last year. But lower energy costs are one of the factors driving consumer prices down. Goldman said there is a risk of trading falling as the economy slows. That would reverse Allegiant’s key trend in 2022: the pent-up desire to travel. Goldman said in the report that clothing and accessories retailer Gap estimates it will see its profit margins improve by 260 basis points between 2022 and 2024. The company is benefiting from new management focus on improving the company’s operating costs. High shipping costs hit Gap’s bottom line last year, and those costs should ease next year. Consumers may also be more willing to spend on clothing as their wages are spent on food and less on rent. More discretionary income could also help Rent the Runway, which completed its IPO in 2021. The company has struggled since its business was hit by the pandemic. But the clothing-sharing startup is on track to increase its profit margins by partnering with more third-party retailers. It recently announced a partnership with Amazon. Rent the Runway CEO Jennifer Hyman said the relationship could be a “key engine” of growth for the retailer. The Russell 2000 has also begun to rebound in recent weeks, moving higher on hopes that the ultra-high inflation seen in 2022 is finally broken. The small-cap index is up 7.4% year-to-date in 2023.