During the final quarter, significant value was added by concentrations in a Generative Artificial Intelligence (GenAI) related semiconductor company and a leading investment bank. Probe positions in a retailer and a pharmaceutical company detracted and were sold as their fundamentals developed counter to our investment theses.
Looking back at the full year, the overall stock market was not as robust as the S&P 500’s 25% return might suggest. Four of the eleven sectors within the S&P 500 returned less than 6% while the Equal Weighted S&P 500 increased roughly 13%. We attribute this disparity to several factors.
Macroeconomics changed little over the course of 2024, so the traditional business cycle did not have a huge impact at either the sector or overall level. GDP year over year growth for 2024’s three reported quarters was contained to a narrow range of 2.7% to 3.0%. Interest rates tell a similar story although a lot more volatility occurred intra-period. The yield on the 10-Year U.S. Treasury ended the year at the same level seen in April despite the September initiation of cuts to Fed Fund rates. The lack of a clear trend change in GDP or interest rates resulted in little difference between the performance of certain defensive sectors (e.g. Health Care +2.5%) and more pro-cyclical areas (e.g. Materials +0.1%, Energy +5.4%). Conversely, macro stability created a tremendous environment for innovation or superior execution to be rewarded in individual stocks.
GenAI was clearly 2024’s dominant thematic with impact ranging from semiconductors to electric utilities. Writing frequently on this topic over the last two years, we will spare the reader further detail on this innovation wave. (At least for now.) Execution was also rewarded last year. Scanning the list of the S&P 500’s twenty best performing stocks in 2024 reveals an airline, a taser company, a manufacturer of engineered aerospace parts, a streaming service, a leather goods purveyor, two private equity managers, and the world’s largest brick and mortar retailer. In other words, it was not all GenAI.
Looking forward, we do not consider forecasting to be our mandate but would like to share a few observations:
- Beginning a new year, it is often tempting to predict a change or a new trend. Our experience is that financial markets are not necessarily influenced by the turn of the calendar page.
- This may be a very short Fed easing cycle. Economic data has proved resilient and inflation stubborn since the first cut. The Fed signaled two 0.25% cuts in 2025 at its December 2024 meeting but that may be optimistic. Remarkably, the 10-Year Treasury yield has risen 1.0%-point since the first Fed cut. Increases from here would likely challenge investors’ appetite for risk.
- Politics may not help in 2025. The S&P 500 rallied roughly 5% in the month after Election Day with the more cyclical sectors taking the lead. Much of that optimism has faded with the Industrials sector currently down almost 3% since the vote. We view extension of the 2017 tax cuts as the most critical issue facing the new administration. Despite a decisive election victory, enacting the new President’s agenda may be more challenging than the results suggest. The Republicans currently hold a one seat majority in the House but have not proven to be a monolithic block. For example, 38 House Republicans voted against Trump’s proposed debt limit extension in December. We see the potential for drama and volatility regardless of the eventual outcome.
The above said, our focus will be on individual stocks and earnings in 2025 just as in 2024.
Best wishes for a healthy and prosperous new year.
Sincerely,
Craig B. Steinberg Matt Ward Bob Ruland
Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is intended for informational purposes only. Actual portfolios may vary. Investing in securities carries a risk of loss. There is no assurance that the investment objectives will be achieved or that the strategies employed will be achieved or that the strategies employed will be successful. Past performance is no guarantee of future results. This presentation may contain forward looking statements or projections relating to future events or future performance. Such statements and projections are subject to a variety of risks, uncertainties and other factors, such as economic, political, and public health, that could cause actual events or results to differ materially from those anticipated in this presentation.
.
During the final quarter, significant value was added by concentrations in a Generative Artificial Intelligence (GenAI) related semiconductor company and a leading investment bank. Probe positions in a retailer and a pharmaceutical company detracted and were sold as their fundamentals developed counter to our investment theses.
Looking back at the full year, the overall stock market was not as robust as the S&P 500’s 25% return might suggest. Four of the eleven sectors within the S&P 500 returned less than 6% while the Equal Weighted S&P 500 increased roughly 13%. We attribute this disparity to several factors.
Macroeconomics changed little over the course of 2024, so the traditional business cycle did not have a huge impact at either the sector or overall level. GDP year over year growth for 2024’s three reported quarters was contained to a narrow range of 2.7% to 3.0%. Interest rates tell a similar story although a lot more volatility occurred intra-period. The yield on the 10-Year U.S. Treasury ended the year at the same level seen in April despite the September initiation of cuts to Fed Fund rates. The lack of a clear trend change in GDP or interest rates resulted in little difference between the performance of certain defensive sectors (e.g. Health Care +2.5%) and more pro-cyclical areas (e.g. Materials +0.1%, Energy +5.4%). Conversely, macro stability created a tremendous environment for innovation or superior execution to be rewarded in individual stocks.
GenAI was clearly 2024’s dominant thematic with impact ranging from semiconductors to electric utilities. Writing frequently on this topic over the last two years, we will spare the reader further detail on this innovation wave. (At least for now.) Execution was also rewarded last year. Scanning the list of the S&P 500’s twenty best performing stocks in 2024 reveals an airline, a taser company, a manufacturer of engineered aerospace parts, a streaming service, a leather goods purveyor, two private equity managers, and the world’s largest brick and mortar retailer. In other words, it was not all GenAI.
Looking forward, we do not consider forecasting to be our mandate but would like to share a few observations:
The above said, our focus will be on individual stocks and earnings in 2025 just as in 2024.
Best wishes for a healthy and prosperous new year.
Sincerely,
Craig B. Steinberg Matt Ward Bob Ruland
Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is intended for informational purposes only. Actual portfolios may vary. Investing in securities carries a risk of loss. There is no assurance that the investment objectives will be achieved or that the strategies employed will be achieved or that the strategies employed will be successful. Past performance is no guarantee of future results. This presentation may contain forward looking statements or projections relating to future events or future performance. Such statements and projections are subject to a variety of risks, uncertainties and other factors, such as economic, political, and public health, that could cause actual events or results to differ materially from those anticipated in this presentation.
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