Quarterly Commentary 3Q’24
New Highs, New Whys
Today's economy finds itself in a true Goldilocks moment—neither overheated nor stagnant, but just about ideally balanced. While some bears awoke during July's weak jobs report, the third quarter ultimately showed its strength: wage growth at +4.6%1, consumption +2.9%2, and inflation steady at +2.5%3, all leading to a late-September bull run in the markets.
This new balance gave the Federal Reserve the comfort it needed to shift from inflation fighter to job market defender, delivering an outsized 50bps cut in the federal funds rate — an action typically reserved for financial crises or currency debacles. Yet this time, the economy was steady, and the rate cut lifted both stocks (S&P +5.5%) and bonds (Barclays Agg +5.2%) for the 3rd Quarter. This Fed pivot not only buoyed broader indices, but it also triggered a notable shift beneath the surface.
In the quarter’s final tally, small caps outperformed large caps by just over 4%, while large-cap value beat growth by ~3%. For those playing along at home, value has been losing ground to growth since the Fall of 2021, while small caps have trailed large caps since September 2022—an eternity in stock market time. Such extended underperformance hints at a potential longer-term inflection point. This is especially interesting to us as monetary policy shifts tend to favor smaller, value-oriented segments. Investors are also realizing that the current enthusiasm around technological advancements is an equal opportunist, benefiting many industries, not just the current shiny objects (e.g., AI).
As investors & the Fed recalibrated, it wasn’t just a matter of size and style—different sectors began to realign, revealing some notable winners and losers. Those positively impacted by lower rates, like utilities and real estate, staged impressive performances—increasing 18.5% and 17.2%, respectively. Industrials surged ahead by 11.2%, lifted by rebounding economic activity. Financials, bolstered by economic resilience and a friendlier Fed, finished ahead of the market by 10.2%. Meanwhile, the once high-flying tech giants began to lose altitude – see Magnificent 74 performance above. In our view, a market rotation is emerging, one less about silicon chips and more about utility grids and industrial tools—perhaps a sign that investors seek stability over promises.
Turning from sectors to individual names in the Figure 8 portfolio, we weren't entirely immune from this rotation. AI and semiconductor stocks provided headwinds for portfolio performance, as investors pulled back from names like ASML Holdings, NXP Semiconductor, and Microsoft, amid concerns about uncertain growth and extended valuations. Throughout the third quarter, investors seemed to favor a shift from "tell me a good story" to "show me real returns."
Conversely, bright spots in our portfolios included strong performances from HA Sustainable Infrastructure, Ameresco, Enphase, First Solar, and Trane—all beneficiaries of falling rates and robust fundamentals. Astute readers will note a common thread—these names are pivotal to the ongoing energy transition. With electricity demand surging globally, these businesses find themselves not just at the forefront of an evolving market but a generational growth opportunity.
Navigating the Energy Transition Amid Surging Electricity Demand
The market's recent shift isn't so much a retreat from high-growth tech as an embrace of the infrastructure needed to power it. As AI and other advances demand ever-greater amounts of electricity, the value of robust utilities, renewable energy sources, and grid resilience has come into sharp focus. A recent International Energy Agency (IEA) report highlights this shift: global electricity consumption is expected to rise by 4%/year starting in 2024 (see chart to the right), driven by economic growth, rising electrification, and intensifying heat waves. This rate of increasing demand, up from 3%/year over the last two decades, is expected to persist through 2050 (see chart, right). Such a trend emphasizes the need for adaptive, resilient energy systems.
What are those solutions? In a word, renewables. According to the IEA, renewables are expected to play the leading role in electricity generation. Solar and wind are projected to meet nearly 75% of the increase in demand through 2025, with renewables surpassing coal's share of the global electricity generation mix—a transformative milestone in energy history (see chart below). Solar is expected to meet nearly half of this projected growth, underscoring its leadership in the energy transition.
Across the U.S., Europe, and China, the momentum behind clean energy extends beyond environmental commitments; it’s also about bolstering energy security and supply chain stability. The transition away from fossil fuels to more sustainable electrification – across homes, industries, and transportation – positions renewables as the foundation for ongoing economic resilience. Renewables are an essential climate solution – and now an increasingly critical part of a resilient energy system, one capable of meeting the demands of growing, energy-intensive activities and services.
Ultimately, the growth of technology and the rise of renewables are inextricably linked. The push toward clean energy is about future-proofing the grid for both consumer electrification and industrial scalability. This imperative for resilience is evident in how we have positioned our portfolio, as bullish long-term investors in both tech innovation and the clean energy transition.
1 Federal Reserve Bank of Atlanta; 2 Bureau of Economic Analysis; 3 Bureau of Labor Statistics; 4 Magnificent 7 = Nvidia, Amazon, Google, Tesla, Meta, Microsoft and Apple* Source for Index & Sector Returns: Bloomberg, Black Diamond You 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.