Following a pause in the third quarter, large-cap technology companies again led markets to close out the year. Keeping with this theme, 2024 saw the lowest percentage of companies (~15%) outperform the S&P 500 dating back to at least the mid-1980s. Despite that concentration at the top, breadth is still good with greater than sixty percent of companies in the S&P 1500 above their 200-day moving average – typically viewed as a healthy sign for markets. In short, the rich (mega-cap technology) are getting richer, but the average company is doing quite well.
Outside of the technology/AI theme, there is uncertainty on a variety of fronts, but investors looked through many of these concerns in the fourth quarter. Still, lack of clarity was a common theme for companies as they look to plan investments amidst an overall healthy economy. The results of the November US elections add another element of uncertainty as investors weigh the potential tailwinds of a more business-friendly administration and likely regulatory relief, offset by potential headwinds due to tariffs and other trade restrictions.
Reversing the trend in the third quarter, the ten-year treasury rate gained close to 1% and is back to the level it was at in May of 2024 reflecting expectations for a pause in Fed easing amidst economic strength and uncertainty on future fiscal and trade policy. This impacted rate sensitive sectors – Utilities and Real Estate fell while Financials had another good quarter of performance. The consumer remains healthy with unemployment at low levels and Consumer Discretionary was the second-best performing sector for the year. In a further sign that investors generally see a strong economy amidst the rising rate environment, defensive sectors like Healthcare and Staples were laggards last quarter.
Many of our technology holdings that were weak in the third quarter rebounded to close the year. Slight underweights in sectors negatively impacted by rising interest rates along with good stock selection in Financials also contributed to performance. On the negative side, homebuilders and some biotechnology/clinical research organization (CRO) companies impacted returns. We substantially reduced holdings in both areas in the fourth quarter and January given concerns about their near-to-medium term prospects. We see this as a favorable environment for our fundamentals focused approach to active stock selection.
Discussion of Fourth Quarter Performance and Positions
Large-cap technology companies were the largest contributors to returns for the fourth quarter and full year. AI was clearly the dominant story in 2024 and seven of the Fund’s top contributors are deeply involved in this theme: Broadcom (AVGO), a developer of semiconductors and infrastructure software solutions; Amazon.com (AMZN), an e-retailer and the largest cloud datacenter provider through its AWS business; Alphabet (GOOGL), a technology conglomerate and leader in internet search and advertising; and Arista Networks (ANET), a developer of cloud networking solutions for data centers and campuses. Monolithic Power Systems (MPWR), a provider of innovative power circuits across a diverse set of industries, and a long-term holding in the Fund, was the largest detractor during the quarter after a strong start to the year based on concerns about share loss to competitors in NVIDIA-based AI servers. We still believe in the company’s ability to deliver above-industry growth, but we are keeping the position size smaller at present, pending clarity on the AI server concerns.
Despite the January volatility in AI names, we continue to see the space as a very attractive long-term growth story. The recent product released by China-based DeepSeek raised fears of reduced investment in AI hardware given the apparent lower cost to train the model. These concerns may ultimately be validated, but in the near term a slowdown in investment appears very unlikely as companies push towards better and better models. Looking further out, the approach the team at DeepSeek used is innovative in terms of reduced memory and model size requirements. The reduction in computing resource requirements results in lower costs, which likely accelerates broader adoption of AI tools. In addition, edge devices (handsets, PCs, smart devices) will be able to run more complex models and deliver greater functionality. The lower cost to run AI models will likely lead to greater demand.
Rounding out the top positive contributors are Axos Financial (AX), a long-term holding in the Fund that continues to deliver strong secular growth and benefited from the rising rate environment along with the broader financial sector.
On the negative side, Lantheus Holdings (LNTH), a health care company focused on diagnostic and therapeutic radiopharmacology, gave back some of its gains from earlier in the year, and ICON PLC (ICLR), a clinical research organization, was impacted by a broader pullback in pharmaceutical research spending. These challenges likely persist for some time and as such we exited our position in the fourth quarter. Finally, D.R. Horton (DHI), a homebuilder, was hurt by the rising rate environment. We see this remaining a headwind for homebuilders in the near to medium-term and sold the position in January.
Despite a mixed macroeconomic environment, we are finding opportunities to upgrade the portfolio across a range of industries, and we continue to work to identify companies with a robust growth outlook over the next 3-5 years trading at attractive valuations.
Investment Outlook
Markets remain at or near all-time highs with good breadth and a growing earnings outlook – conditions for equity investors generally appear favorable. But uncertainty has clearly increased, especially regarding mid- and longer-term interest rates. We are beginning to see signs that this is impacting consumer purchasing of large ticket items (homes and autos), as well as corporate investment decisions. Corporate cash flows and balance sheets are generally healthy, but many companies are beginning to hesitate to make long-term commitments until they see greater clarity on budget deficits and the regulatory/tariff environment. Amidst economic strength and stable but above target inflation, the Federal Reserve left short-term interest rates unchanged at the latest meeting and indicated greater caution on the future trajectory of rates. Geopolitical risk remains elevated and great power tension over technology, territory, etc., just adds to the challenge of planning for the coming years. Finally, the Equity Risk Premium, a measure of the excess return equity investors should expect vs. treasury bonds, is still near a 15-year low.
US Stock Market investment returns have been significantly above average for the last fifteen years. Annual returns of close to 14% for that long of a period are likely to be followed by lower returns, though long-term return prospects remain positive and still appear much more favorable than they did in the late 1990s. Bull markets and bear markets inevitably follow one another, but there are no set timetables, just the certainty that they do not last forever.
We remain in a strong market, with broad stock indices near their highs. Corporate earnings are expected to continue to improve in 2025. We are finding attractive new investment ideas.
We hold a diversified portfolio of stocks in your account. Our largest holdings as of February 13, 2024, are as follows:
| Amazon.com (AMZN) – Consumer Discretionary | Meta Platforms (META – Technology |
| Sprouts Farmers Market (SFM) – Consumer Staples | NVIDIA (NVDA) – Technology |
| Alphabet (GOOGL) – Technology | Taiwan Semiconductor (TSM) – Technology |
| Apple (AAPL) – Technology | Axos Financial (AX) – Financial Services |
| Broadcom (AVGO) – Technology | Arista Networks (ANET) – Telecommunications |
The ten largest positions listed above are 33.2%. In terms of sector exposure, we are slightly overweight Financials and Telecom relative to the broader market index, roughly in-line with Consumer Discretionary, Consumer Staples, Energy, Health Care, Materials, Industrials, and Technology, and we are slightly underweight Real Estate and Utilities. All sector exposures are within 3% of the benchmark weighting in keeping with our focus on individual stock selection. We continue to see value in active management as it affords us the ability to both manage risk when valuations look stretched and to take advantage of overdone corrections in attractive companies.
We look forward to updating you in April and we are always available to assist in any way we can.
Sincerely,
The Shaker Investment Team
