Quarterly Commentary 4Q’24
A Year of Surprising Strength
As we’ve written here before, 2024 was a year of surprising economic strength for the U.S. In fact, the year ended up shattering consensus views about both the economy and the markets.
By December, very few start-of-year predictions* proved correct: Rate cuts? Markets that had priced in seven Federal Reserve rate cuts early in the year ended up digesting just three. Economic slowdown? Instead of the widely predicted rate-induced headwinds, GDP accelerated to nearly 3% while the jobs picture stayed solid. Inflation? Predictions were for aggressive rate cuts to slash inflation to near the Fed’s target of 2%; while price increases did retreat from 5.6% peaks, the 2% target proved elusive. A slowdown for U.S. equities? Far from predictions of modest returns, the S&P 500 added another 20+% gain, building on 2023's remarkable performance. The market's optimistic mood proved contagious beyond equities, with speculative assets like Bitcoin and high-yield bonds rallying. Perhaps most telling was the 10-year Treasury yield's unexpected rise from 3.9% to 4.5% even as the Fed cut short-term rates by one percentage point—a move that should have been a headwind to both equities and speculative assets, but instead coincided with their continued rally.
The 4th quarter amplified these market dynamics. Despite brief signs of broadening market participation following the 3rd quarter, the year ended with a familiar pattern – U.S. large-cap stocks, particularly the mega-caps, reasserted their dominance. As shown in the quarterly performance scorecard (see chart at left), this divergence in market returns was particularly pronounced in the year's final months.
In Figure 8 portfolios, the largest detractors for the quarter were alternative energy holdings like Ameresco and First Solar, which, despite solid fundamentals and growing order books, faced significant pressure as fears of potential revisions to the Inflation Reduction Act (IRA) triggered broad sector repricing. Software giant Adobe also S&P Small Cap S&P Mid Cap underperformed on concerns about near-term AI impacts on its business (in our view, Adobe is an AI beneficiary over the longer term). At the same time, smaller market capitalization stocks generally lagged large as investors preferred domestic mega-cap growth stocks. The biggest contributors to Figure 8 portfolio performance for the quarter was semiconductor manufacturers with dominant market positions like Taiwan Semiconductor, select communication services companies like Netflix, whose programming soared, and Alphabet, benefiting from enthusiasm for digital media, AI-related themes, and breakthrough technology innovations (e.g., quantum computing).
For 2025, the US economy continues to paint a resilient picture. The business cycle is evolving favorably, with GDP growth poised to exceed expectations for the second consecutive year at 2.5-3.0%. The post-election shift in Washington brings familiar policy debates about deregulation, trade policy, and tax reform. Yet history suggests the economic impact of these changes may be less dramatic than headlines imply.
Our base case for markets this year remains constructive, though significant uncertainties loom: shifting global alliances, unprecedented dominance of mega-technology companies, and potential policy changes all warrant careful attention. As an impact-focused investment firm, we are particularly attuned to how these shifts may affect both market opportunities and vulnerable communities. Against this backdrop of uncertainty, we see particular opportunity in areas where market sentiment has diverged from economic fundamentals. The clean energy transition stands out as one such area, where the underlying economic momentum continues to build despite market headwinds.
The Green Transition Continues: Beyond Political Headlines
The clean-energy industry's performance in 2024 stands in stark contrast to its economic fundamentals. While the Clean Edge Energy Index dropped 18% in 2024 (extending a four-year decline of nearly 50%), the actual deployment of clean energy technology and infrastructure has accelerated dramatically.
This disconnect between market sentiment and economic reality is particularly evident in the IRA's impact. In just two years since its passage, companies have announced 334 major clean energy and clean vehicle projects nationally, representing $126 billion in investments and over 109,000 new jobs. Perhaps most telling is where these investments are flowing: nearly 85% – some $106.8 billion – are destined for Republican congressional districts. *** From Toyota's battery plant in North Carolina ($17.7B, 5,330 jobs) to Hyundai's EV facility in Georgia ($6.8B, 5,902 jobs), red states are emerging as unexpected beneficiaries of this transition, for straightforward reasons. These districts offer what major industrial projects need most: accessible land, available labor, and communities eager for economic growth.
Despite another challenging year for clean tech valuations, our conviction remains unshaken. The evidence is compelling: over 90% of post-IRA projects are in manufacturing, building the foundation for lasting transformation. As illustrated in the chart to the left, US utility- scale solar installations are accelerating dramatically, demonstrating the tangible impact of these manufacturing investments.
Looking ahead, this disconnect between market sentiment and economic reality presents both challenges and opportunities. While policy shifts may create near-term volatility, the economic momentum behind the clean energy transition appears increasingly resilient. With billions in private investment and thousands of jobs at stake, these initiatives have evolved beyond environmental policy – they're becoming crucial engines of local economic growth. As climate events like the devastating fires currently threatening Los Angeles remind us, the urgency for climate solutions continues to grow. For patient investors willing to look beyond short-term market reactions, these fundamental drivers suggest the gap between perception and reality may ultimately resolve in their favor.
* Economic expectations (displayed in box) are sourced from the Federal Reserve’s December ‘23 Summary of Economic Predictions; S&P expectations from Goldman Sachs December 2023; End Results: Bloomberg, FRED, BEA ** Source for Index & Sector Market Performances: Bloomberg, Black Diamond*** https://www.cnn.com/2024/06/16/climate/clean-energy-investment-republicans/index.htmlYou should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.